If anyone can steady the mortgage industry's nerves, it is the Scot ready to lead the sector...JOHN Goodfellow knows all about mortgage meltdown and housing market crises. The Scot now preparing for his next big role in the building soc
iety sector is one of the few home loan bosses still in his post after surviving the last property slump, and he's gripping the handrail in readiness for another bumpy ride.
As an IT backroom boy he was suddenly thrust into the hot seat at the Skipton building society in 1991 when his dynamic predecessor died tragically young.
It was the year when 1,500 families a week were kicked out onto the streets. House prices had begun falling and continued their downward slide for a further four years.
During the boom years, Skipton had grown from a sleepy, old-fashioned Yorkshire building society to a big aggressive beast. Not quite the Northern Rock of those days, many commentators nevertheless eyed it nervously.
But the Glasgow-born chief executive and the society survived and thrived.
Is history repeating itself? In May, the former Allan Glen's pupil will find himself back in the eye of the storm when he takes over as chairman of the Building Societies Association. Many in the mortgage world will sigh with relief to have such an experienced and tough operator in this key post as the industry faces its most difficult year since the last housing crisis.
Goodfellow has two endearing qualities. First, he is never afraid to tell it like it is, and he believes borrowers should brace themselves for a mortgage shock in the months to come, because the credit crunch has torn up the rules of the homebuying game.
He warns we are heading for a mortgage famine, and the days of easy lending, much of which he describes as "madness, complete and utter insanity", have gone. Home loans will become more expensive, scarcer, remortgaging impossible for many, and house prices will trickle down.
The second chain in his charm armour is that he doesn't tolerate fools gladly, and is deeply sceptical about the ability of Government or regulators to manage our way out of the current crisis. A near-neighbour of Northern Rock, which converted from a building society to a bank in 1997, he is scathing about the performance of just about everyone involved.
"The Northern Rock crisis was caused by poor management, an uncontrollable chief executive, weak non-executive directors, weak supervision, a political leak and thereafter crass ineptitude," he says.
"Here, we had a bank with no money whatsoever, and a run with customers queuing outside branches. What does the Government do? It starts guaranteeing a bank which has effectively already gone bust.
"What should you do if you are running a mortgage bank with no money? It's not rocket science. You put rates up to chase borrowers away, I'm sorry to say, you sack staff, pare costs to the bone. These are the first things you absolutely have to do at the earliest sign of trouble. What did Northern Rock's management do? Nothing."
He believes this is the strategy that will be adopted by Ron Sandler, who has been put in by the Government to run the Rock. But he questions why he needed to be paid a salary of £90,000 per month – over £1m a year – to do so. Goodfellow's total package including pensions last year was £630,000.
"He'll go in and do the obvious, break it up and sell the assets off. It's no secret. When a bank has run out of money, it only has one option. You get the money back from the people you lent it to and sell off everything you can. There is nothing you can do but chase customers away. It'll take three years but after that Northern Rock will be nothing but a bad memory."
But he does believe the fiasco raised crucial questions about the supervision of UK banks and other financial institutions, and bizarrely must be one of the few people in Britain who will admit feeling sorry for the Financial Services Authority. Most believe it was to blame for the muck-up which left Britain's banking industry a laughing stock around the world.
Goodfellow argues: "I do feel sorry for the FSA because I'm not sure what else it could have done. It simply doesn't have the power. And this is the very worrying aspect of current arrangements. If you ask me, who has the power to say to an out-of-control organisation: we don't like what you are doing, and this must stop? I honestly don't know the answer."
Not that he believes much of this will impact on the housing market in Scotland, where the Skipton has six branches, with plans to open a seventh in the Borders. It also runs part of its £52bn mortgage administration business from Glasgow. The UK's sixth biggest building society, with £10bn assets on its own balance sheet, also has 25,000 branch-based savers north of the border, with postal savers on top.
Scotland is one area Goodfellow is upbeat about, although he acknowledges that the picture is fragmented.
"Undoubtedly, we are in the middle of a house price correction, but you can argue we needed to reduce prices if first time buyers were ever to get a look-in. Different geographical areas are being hit very differently, and certainly the Scottish market remains reasonably strong. But the picture can be very different not only from town to town but from street to street."
Elsewhere, he says, the market is dead. "In a typical year, we might see 1.4 million house sales in the UK. Of these one million are driven by life events, such as getting married, divorced, arrival of children, job moves, departure of children, and death.
"The remaining 400,000 are lifestyle choices, the froth on the market. In difficult times these simply disappear. Right now we are running at a rate of around 800,000. This means we are not even seeing essential moves. People can only delay for so long."
He hopes confidence will return when the bank reporting season is over. Following last week's results by Barclays and Lloyds TSB, commentators accept our banks remain strong. He is optimistic business will pick up to a running rate of a million annually in the second half of this year. There'll be no return to boom, but transactions should begin ticking over again. The society currently has 124,000 borrowers and 740,000 savings accounts.
But even then borrowers' problems will be far from over, although he dismisses any suggestion of a 1990s house price crash. The biggest obstacle to a strong recovery will be constraints on mortgages, which will keep mortgage bills high and stop prices taking off again. "I don't believe there will be a major house price crash, but we will see a trickling down in areas where they became overheated. That will stop at a point where buyers think sanity has returned."
Mortgage finance will be much more difficult to come by and the remortgage market will dry up, because moving from one lender to another will be neither easy nor profitable. He is not surprised that lenders have now ditched their 125% loans, pulling out of the riskiest of all markets last week.
"We are facing two problems. Firstly we can't guarantee being able to raise cash on the money markets, so if we offer an attractive deal and it is very popular, we may not be able to get the money to fund it. We just don't know, and this uncertainty will constrain all lenders. But the regulator is also putting us under pressure to increase liquidity, which means we must anyway keep more money in reserve. This again leaves us with less to lend.
"There will still be good deals, but they will be much more limited. Borrowers will have to be quick."
Lenders across the piece are looking to de-risk their portfolios.
"I'm afraid this means that when your competitive two-year or three-year deal ends, don't expect to be able to switch to a similarly bargain basement deal with a new lender. The chances are you will be stuck with whatever your existing lender offers. This quality-driven approach will push up costs and itself slow the market down."
Even though interest rates are expected to fall again later this year, he doesn't believe monthly home loan bills will necessarily be any lower, as lenders widen their profit margins.
But it is on the question of affordability, or income multiples, where he has the starkest warning. These will be clawed back from up to seven times earnings to the historical norms of three or 3.5 times. This in itself could severely constrain price growth.
He says: "Some of the lending which has gone on of late has been madness, complete and utter insanity. Now we'll go back to the traditional patterns of lending, which we know work well for the borrowers as well as the lender. And it will probably be a good thing."
As for the buy-to-let market: "If you've got a portfolio of 20 flats in city centres then God help you. There are far too many of them and they are far too expensive."
