Mortgage lenders told to prepare for worse times

By Clara Ferreira-Marques

LONDON (Reuters) - The financial watchdog has issued one of its starkest warnings on the state of the mortgage market and credit conditions, telling lenders to prepare for bleak times and secure adequate liquidity, even at high prices.

Clive Briault, retail managing director at the Financial Services Authority, told top lenders on Tuesday that borrowers are likely to come under strain in 2008, with many unlikely to be able to refinance their home loans at attractive terms -- and some unable to do so at all.

According to the FSA, at least 1.4 million short-term fixed- rate mortgages will end in 2008.

"Many of these borrowers are on relatively high loan-to-value ratios or income multiples and will find it difficult (if not impossible) to refinance their mortgage on favourable terms, which will leave them facing a significantly higher interest rate on their borrowings, which may prove too much for many of them to afford," Briault said.

He said subprime borrowers "may not have access to the market at any price" until normal conditions return.

In his speech at the Council of Mortgage Lenders' annual conference, Briault told lenders to protect themselves for tough market conditions by ensuring they have adequate levels of liquidity -- and liquidity of adequate quality.

"(It) would be prudent to pay a correspondingly high price -- and to forego some profits -- to secure this protection, or otherwise to scale back balance sheet growth," he said.

Touching on one of the key lessons learnt from the near-collapse of Britain's fifth-largest mortgage lender, Northern Rock NRK.L in September, Briault said firms should also do more to revise tests to ensure they can withstand more turmoil, particularly covering liquidity and credit risks.