MARKET CONDITIONS REPORT: SPRING 2008

Bank says credit fears overstated

Banks have overstated their exposure to mortgage-linked investments and could delay an end to the credit crunch as a result, the Bank of England says. In its Financial Stability Report, it said fears of financial meltdown may become a self-fulfilling prophecy.
Banks previously over-willing to lend were now too cautious, even with credit-worthy borrowers, it suggested.
The worry is that by being too cautious, banks may deprive consumers and companies of much needed financing.
An increased fear of risk, prompted by a drop in the value of investments linked to mortgages, has undermined confidence in financial institutions and made them reluctant to lend to each other and consumers, the Bank added.

The Bank of England thinks their fears are exaggerated
Robert Peston, BBC business editor

Credit markets "are likely to overstate significantly the losses that will ultimately be felt by the financial system and the economy as a whole", the Bank of England said.

"It will exaggerate to an even greater extent the potential damage to the real economy."

Howard Davies, director of the London School of Economics and the former head of the Financial Services Authority, said the Bank's report was a signal that the worst of the credit crisis could be over.

But he said the economy could still face other problems:

"We now may be just moving into straight forward economic recession where all kinds of other assets begin to deteriorate in quality and in price."

Fears exaggerated

BBC business editor Robert Peston said the report marked a substantial shift in emphasis for the Bank of England.

"Financial institutions are currently assuming that losses on sub-prime will be on a scale without any precedent," he said.

"The Bank of England thinks their fears are exaggerated."

"It now believes that the market price of sub-prime investment products overstates likely future losses on sub- prime lending by about 100%."

The Bank estimates that UK banks still have a potential exposure of $192bn to structured credit products - such as mortgage backed securities - which they are finding difficult to sell.

That is still a higher exposure relative to the size of the economy than among US banks ($490bn) or among European financial institutions ($235bn)

Confidence to return?

The twice-yearly report says that there is a "significant increase" in the risk that a major bank collapse or reluctance to lend will disrupt the financial system.

And it says the process of adjustment is proving "even more prolonged and difficult" than expected.

The banks should return to sensible lending policies Rhys Jaggar, Leeds

The Bank still judges that the most likely outcome is that confidence will gradually return to markets, and does not see that all the exposure will result in losses.

But the size of the problem helps explain why the Bank was prepared to provide an additional £50bn to help ease the credit crunch facing UK banks. The Bank of England also warns that there are potentially large exposures that have still not been declared by financial institutions.

It added that the credit crisis demonstrated that banks' risk management systems were weak, and they had not realised that risks could not be easily dispersed around the financial system but would flow back to the banks themselves.

The Bank of England judges that there is a risk that "the currently elevated risk premia in some markets will persist".

"This could lead to a self-fulfilling adverse cycle in which persistent market illiquidity and falling asset prices further undermine confidence in banks and results in a sharper tightening of credit conditions," it said.

Lending drying up

The report demonstrates how quickly lending is drying up.

The Bank's quarterly survey of credit conditions shows that lenders are tightening up credit sharply not just on home loans, but also on household lending and commercial loans to companies.

And the sources of future loans in wholesale money markets have also contracted sharply.

The market for "asset-backed securities" such as sub-prime and other mortgages has collapsed - with the value of such assets issued going from $700bn a quarter in the middle of 2007 to just $100bn in the first quarter of 2008.

The Bank of England argues that to rebuild financial confidence, it will continue to allow UK banks to swap illiquid assets with safe UK government securities.

And they say that banks will need to bolster their capital and make further disclosures of their financial position, and explain better how they are valuing complex financial instruments.

In the long term, the Bank of England wants to change the rules under which banks operate, so that they recognise risks, and possibly put aside some extra money in good times to secure against risk in bad times.

And it says that more effective systems are needed so that central banks can respond more quickly in a crisis, such as the run on the Northern Rock. Our attitude to present market conditions:

When the market is not quite so vibrant, the vendor needs the experience and conscientious service that Dudley Singleton & Daughter provide. In the 30 odd years we have been in business we have seen the face of the market change continuously – recessions, peaks, troughs – we have seen them all, but there is still no doubt historically as can be seen on this website of properties we have sold in the past and properties we have sold again recently, investment in our area is fantastic. So, when you buy into this part of the world, you not only buy a home in a wonderful area with easy access to major centres of commerce, but you are making perhaps the soundest investment of your life.

Aggressive and persistent marketing does pay dividends and certainly at Dudley Singleton & Daughter we never relax – we never stop advertising, we never stop showing just because a property has not sold immediately – and we continually keep in close contact with our vendors, advising them of market conditions and also of the comments, because feed-back is so important, from applicants who have viewed their property. This type of interactive dialogue and communication not only instils confidence in the vendor, but also allows the vendor to build a picture of what the market place thinks of his property, whether he needs to make any improvements or adjust the price. Dudley Singleton & Daughter are not afraid to give you advice on reasonable improvements that would give you more saleability and, at the end of the day, a better selling price.

Another important factor that can only come from experience, in the first month of marketing it will become very clear to a vendor just what the market thinks of their property. It is a common fault in agency, lack of communication, which Dudley Singleton & Daughter will not tolerate.

It is our opinion that truth is always of paramount importance and truthful, constant feed-back and advice create not only a rapport and trust between agent and vendor, but will have the knock-on effect of a proposed purchaser and applicant feeling confident to trust the information and help that Dudley Singleton & Daughter will give when they open negotiations to purchase a property. This combination of factors inevitably leads to a sale at the fullest possible price in the prevailing market.

We are, after all, a family firm with nearly 35 years of trading from the same office in Pangbourne, a dedicated team of mature professionals who know their business, Dudley Singleton, Katherine Singleton, Lesley Beardsley, Jane Harms, Audrey Walton. No badly trained youthful staff here, no patronising pompous attitudes, no large egos here that overshadow the care and consideration for both their vendors and their applicants. I know some agents who believe they are doing a vendor a favour taking on their property and selling their home and they believe themselves to be more important that either vendor or applicant almost to the extent sometimes both vendors and applicants when they ring those agents’ offices appear to be a bit of a nuisance. We are the opposite; our vendors are the most important people. However, we never forget to make absolutely certain that our applicants are also treated with the consideration and care they deserve, that is why we have been here for 35 years and that is why we are still instructed by clients we sold to 35 years ago.

We are in a service industry, we remind ourselves constantly of this fact and maintain an up to the minute, informed and professional attitude, coupled with care, which eases for both vendor and applicant the trauma of selling and buying.