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March 31, 2008

Building societies no longer immune to credit squeeze

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by Kay Mitchell

Building societies no longer immune to credit squeeze

Last week, the Council of Mortgage Lenders (CML) showed £24 billion worth of mortgages advanced in February, 7% lower compared with the previous month and 6% down on the previous year.

Michael Coogan of the CML said problems in the money markets had left its members unable to meet demand, as they effectively ran out of money to lend.

Demand for mortgages remains strong but cannot be fully met from existing funding. This has led many lenders to reduce their product ranges, increase their mortgage prices and, in some cases, to reduce their lending capacity, added Mr Coogan.

Member-owned building societies, which are more conservative and fund their mortgages mainly through savers’ deposits, were considered immune to the problems, but this is no longer the case.

Inundated with mortgage applications from borrowers who have been refused elsewhere, or who fear they will be, smaller lenders are having to withdraw offers because they are unable to meet demand.

Demand is expected to continue throughout 2008 as around 1.4 million fixed-rate deals are due to expire this year. As panic sets in, lenders, mortgage brokers and mortgage comparison websites are experiencing a high level of demand.

Late last week, Nationwide scrapped its previously lowest-priced tracker deal of 5.73% and replaced it with a rate of 6.4%.

In addition, Bath Building Society has pulled out of new mortgage lending altogether other than to offer an uncompetitive standard variable rate (SVR) of 7.4%. A spokesperson for the society said they have been ‘overwhelmed’ with mortgage applicants. ‘We are a very small lender with 1,500 borrowers. We have to manage volumes carefully.

Small societies such as Melton Mowbray, Newbury and Tipton & Coseley, have closed their books to all but those customers who live in the immediate vicinity of a branch.

Earl Shilton, based in Leicester, has announced it will only lend to those with at least a 50% deposit and then only at a 7.4% SVR.

Last week, the Building Societies Association (BSA), said the UK’s 59 building societies are in good shape in spite of the ongoing liquidity concerns in the UK’s banking sector.

The BSA announced that building societies are not struggling in the aftermath of the credit squeeze despite reports revealing some had tightened their lending criteria.

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