Another mortgage lender closes its doors as investors take fright 

Sub-prime mortgage lender Magellan Homeloans has called time on all new lending with immediate effect, claiming competitive pressures in the mortgage market. 

In a statement released today, the specialist mortgage lender said increasingly expensive funding costs combined with the competitive pressure to keep mortgage rates low meant it could no longer justify making new loans. 

A spokesman said: ‘In response to competitive pressures the business has recently seen a number of lenders reducing mortgage loan interest rates and increasing credit risk despite increased funding costs. 

‘Viewing this as unsustainable Magellan has reluctantly taken this decision.’ 

Lehman Brothers folded in 2008 following a prolonged closure of the money markets

A senior source at a UK challenger bank told This is Money that the failures could in part be put down to investors taking fright.

‘Bank funding of specialists is always the first to go belly up – that’s what happened at Amicus in December. 

‘The next to go is private investor money,’ said the source. Both Fleet and Magellan are funded all or partly in this way. 

The UK money markets are also deathly quiet, according to the source.  

‘Spreads in the whole market have blown out over the past year with the cost of funds now 50, 60, 70 basis points higher than they were in the first half of last year. 

‘A year ago, mortgage backed securities were priced at 65bps over Libor on senior notes. Now it’s more like 125bps over Libor. Investor confidence has dropped back to what it was back in 2007/8.’ 

Writing in an industry blog, Lynda Blackwell, the former mortgage sector manager at the Financial Conduct Authority and now an independent consultant, said: ‘On the face of it, the market appears highly competitive: we’re seeing intense price competition, new lenders coming to market and increasing numbers of products available. 

‘Break the surface and things don’t seem so rosy. There are over 140 active lenders in the market today but the top six account for around 73 per cent of total residential lending in the UK. That leaves 136-plus active lenders chasing a 27 per cent share.

‘Those lenders can’t possibly compete with the top six, with their massive funding advantage and dominant position in the market.

‘These lenders need to price for the risk they are taking and need those margins to survive. But they also need to be able to compete on price, or at least be in the same ball park.

‘So they inevitably react to the aggressive pricing we are seeing at the super-prime end of the market. Margins are squeezed. And wholesale-funded lenders need to price to offset funding costs.

‘Higher funding costs in the wholesale markets is putting pressure on already thin profit margins. With consumer confidence falling, rumours of a recession and house prices under pressure, it’s a brave originator who will looking to acquire mortgages other than low loan-to-value prime.

‘We’re starting to see the impact of all of this with firms halting lending and even exiting the market. Something has to give.’