Financial Risk blogs
The Bank of England has published their first report on the potential impact of the Coronavirus Pandemic on the banking sector and UK economy. The report focuses on the recent performance of the financial system after the seriousness of Coronavirus was reported, the resilience of the UK banking sector amidst the Coronavirus Pandemic and discusses the financing of the corporate sector during the Pandemic. The report also includes a scenario which based on the assessment of risk of the UK's financial stability and the resilience of the UK's economy. If the scenario is correct, it would see the GDP of the UK falling to 14% which would equate to the worst annual slump for more than 300 years. The report can be read here
Our earlier article on non-bank funding mentioned that proposals had been submitted to the Bank of England and HM Treasury to provide support packages for non-bank lenders. A decision was expected this week as to whether the submitted proposals would be accepted however discussions are still ongoing and as of yet, no decision has been made to approve the support packages.
Following the Government’s implementation of social distancing, carrying out a physical valuation has not been possible and this has lead to a suspension in new mortgage applications. As the social distancing measures continue, lenders are looking for solutions to allow valuations to be carried out remotely such as desktop valuations. Desktop valuations do not involve a physical visit to the property rather, the valuation is based on aggregate data such as comparing the 3 most recent properties in the area and other comparable properties in the local area. So, if desktop valuations offer a solution, why aren’t lenders using these? The answer depends on whether the lender securitises their loans. Securitisation is used by lenders which obtain their capital from the capital markets as opposed to the Bank of England. Lenders who secure their mortgages package up a number of these (known as mortgage backed securities) which are rated by a rating agency depending on the financial stability of the package and sold to an investment firm in return for capital. The downside of desktop valuations is that they are not readily accepted in the capital market where the securities are sold. In fact, lenders who utilise desktop valuations offer suffer financial penalties or the rating issued by the ratings agency is lower, which may make the investment less attractive to potential buyers. As social distancing measures continue for the foreseeable future, the volume of lenders accepting desktop valuations are likely to increase but it is likely to be used for residential purchase and remortgage cases to begin with.
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