UK Banks Sharply Restrain Mortgage Lending in October

The British Bankers' Association (BBA) this morning reported significant declines in mortgage lending activity for October. These data cover the nine members of the "Major British Banking Groups", which account for some two-thirds of all UK mortgage loans outstanding.

The net change in loans outstanding at these big banks was £4.95 billion in October, markedly less than September's £5.88 billion and the smallest monthly amount since December 2005, £4.90 billion. The peak month was December 2006 at £6.04 billion.

The accompanying loan approval information is valuable, of course, as a leading indicator of the actual loans made. This showed distinct weakness in October, with the number of loans approved for home purchase at just 44,100 (absolute figure, not rounded or annualized), compared with almost 54,000 in September. The year-ago number was 70,458 and the recent peak was 78,301 in November 2006. Loan approvals for remortgaging and for "other" purposes -- this last importantly including equity withdrawal -- also decreased significantly. As seen in the second graph here, the last "other" category has been drifting downward since a peak in late 2003. But straight refinancing loans have more or less paralleled home purchase loans since early 2003. Both of these loan groups retrenched somewhat with the Bank of England tightening during 2004, but held up well during more interest rate hikes from mid-2006. Finally, both purchase and remortgaging loan approvals began to come down more decisively in May this year and have continued to decrease since then despite the BoE's steady rate policy beginning in August.

These lending data for October reflect the first full month following the international credit crunch of late August and September. In the UK, this directly involved Northern Rock, one of the nine "Major British Bank Groups" and a "Top 5" mortgage lender, which experienced massive deposit runs in September. The October figures thus illustrate clearly the impact of reversals in the global mortgage security market. Additionally, press reports today also indicate that Northern Rock's own delinquency experience has been worsening. Broader data on mortgage possession actions from the UK's Council of Mortgage Lenders show a sharp uptrend in such proceedings beginning in 2006. So while we may be disturbed by loan performance in the US, it is certainly not the only country where borrowers are faltering, contributing to an eventual slowdown in the entire home financing system.