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Are U.S. Mortgage Woes a Warning Sign for Other Countries?
By Ted Cornwell
With home lending firms in the U.S. and the U.K. eyeing each other's turf, they have to watch each other's market trends as well. And a recent report suggests that lenders in the United Kingdom might want to think twice before emulating U.S. lending practices too closely.
With firms from both countries moving aggressively across the pond in recent years, the concern about the effects of the U.S. mortgage market's meltdown spreading overseas are taking on greater importance.
But it turns out that the U.S. and U.K. markets are not synchronized with regard to cyclical trends in the industry. In fact, lending volume, home prices and credit risk currently seem to be at opposite ends of the cycle, according to a report from TowerGroup of Needham, Mass.
That leaves companies that are considering expansion in something of a quandary, particularly for firms on the British side of the equation. Can they use cross-border expansion to smooth out cyclical risk? Or does weakness in the U.S. credit conditions portend an imminent downturn in the U.K.?
While lending volume declined sharply in the U.S. last year, U.K. volume continued to rise. TowerGroup attributed this partly to the prevalence of short-term, adjustable-rate home loans that reprice automatically in the U.K., causing mortgage refinancing to occur more consistently across rate cycles there.
Craig Focardi, research director of the consumer lending practice at TowerGroup, said the firm's research suggests British lenders should expand in the U.S. cautiously, lest they become ensnared in a credit downturn. However, he said in a news release that firms in both countries might be able to use international expansion to "potentially diversify and smooth out mortgage segment revenues and profits.
"But they must assess these benefits in the context of the potential for decline in U.K. home prices and the rising loan default rates on the horizon," he said.
So far, home prices have continued to rise strongly in the U.K., in stark contrast to the U.S. market. But anyone involved in the U.K. market ought to pay attention to "warning signs" coming from the U.S. market, TowerGroup said.
So what can U.K. lenders learn from the credit problems being faced today by U.S. lenders?
TowerGroup believes that for starters, they should think about diversifying their portfolios and maintaining vigorous underwriting standards when loan volume does threaten to contract.
They should also maintain vigilance by regularly assessing the risks inherent in their portfolio and updating their collection strategies and IT systems, TowerGroup said.
Learning from the "irrational exuberance" experienced in some U.S. markets, Mr. Focardi said U.K. lenders should brace themselves for a potential decline in home prices along with a rise in nonconforming and subprime mortgage defaults.
"The U.K. has an advantage in seeing the effects of overheated housing and mortgage markets in the U.S., and should heed the U.S. experience instead of claiming that 'we're different, it can't happen here,'" he said.
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