Amidst all the doom and gloom we read and hear about everyday, I thought it might be useful to provide some insight on the current state of play in the mortgage market.

Where are we now?

The mortgage market is undeniably in turmoil. It’s doubtful if anyone in the industry has ever witnessed anything like it. From an intensely competitive market on all fronts-products, margins, price and criteria- we’ve moved to a situation where almost every lender is too scared to do anything. They are frightened to introduce new products in case they get swamped from a demand they cannot possibly meet. They are desperately trying to recoup their losses from the crisis in the American sub-prime market and consequently they are all pricing their products upwards and will probably continue to do so even if we get the anticipated 0.25 per cent cut in interest rates today.

What’s the cause of this?

There are three reasons.

First, there is not much money around to fund new mortgage lending. Many banks used to use their deposits i.e. money in savings accounts- to fund their mortgage lending. Recently, however it has become fashionable to use the money markets instead, i.e. borrowing from other banks, or from the sale of packages of mortgages known as mortgage-backed securities or “MBS”.

The American market used “MBS” to fund their sub-prime mortgage lending which equated to about 20% of all their lending - in the UK, sub -prime lending, which is much better regulated, has never accounted for more than 8%. When the housing market in the US collapsed, most sub-prime borrowers fell into arrears causing lenders both in the US and over here to lose millions and in some cases billions.

Consequently banks are now desperate to recoup their losses. They are reluctant to use the money markets anymore for mortgage lending, preferring to rely once again on their deposits. They are wary of lending to each othe, because they are uncertain of their exposure to the US market. As a result LIBOR, the rate at which banks lend to each other is currently over 1% higher than the Bank of England base rate.

The second reason is a lack of confidence in the banking community itself. No-one is certain what will happen to the housing market, or to the economy if America goes into recession which could happen.

The third reason is a lack of capacity amongstlenders to handle large volumes of business. With fewer lenders around- some having gone to the wall and others “temporarily withdrawing from the market”- borrowers and mortgage brokers have less options to place their business, causing backlogs in those lenders who still want to lend. Faced with this problem the banks are trying to put borrowers off by a combination of higher rates, higher arrangement fees and a tightening of loan to value criteria.

When will we return to normal?

Probably in 2009, but we will not return to the “normality” of the last few years. The days of cheap money, as I’ve said before are long gone and so are many of the specialist sub-prime lenders who offered such competitive rates.

Are there any reasons to be cheerful?

Yes. Interest rates are falling. They could be as low as 4% by next year, so LIBOR will fall as well, making it easier for banks to start lending to each other and cheaper for homeowners to start borrowing again.

The Bank of England is trying to improve market liquidity by pumping money into the system and the Chancellor has just appointed a new committee- groan- to address this very problem. Actually it’s being chaired by the ex boss of HBOS, so hopefully they will know what they are doing and will come up with something that works.

Finally nd I hate this term but it’s so easy to use, the fundamentals of the UK housing market are strong. Employment and immigration are at record levels and we still do not have enough houses to match the demand.

Banks will have to start lending soon if they are to make money, but they will ration the availability of mortgages and they will be much choosier to whom they will lend.