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Between proc and a hard place

Our panel debate whether retention deals go against TCF principles, plus are lenders being too aggressive in chasing arrears?

Do you think lenders’ strategies of paying full proc fees on retention deals are against the principles of treating customers fairly?

Black:

Payment of a proc fee for retention is fair enough, provided that fair value is delivered to the client by reviewing the suitability of the mortgage in light of the client’s needs and objectives at the time of the review.

The review should take account not only of the suitability of the current mortgage but also the possible availability of a better product from the rest of the market. A firm recommendation should be made as to the course of action to be taken by the client. It may well be that the retention fee is not sufficient to pay for this work, in which case we would charge an additional fee to the client.

Pendergast: I would say this is actually pro-TCF. Previously, if the mortgage stayed with the existing lender, no proc fee would be payable. This levels the playing field as an adviser is more likely to look at the existing lender if a proc fee is payable than if it is not. The payment of proc fees for retention cases can only be good for consumers as they are now more likely to not have to pay a fee if the mortgage stays with the existing lender as the adviser will now receive a proc fee.

Lakey: Only when the adviser fails to act in his client’s best interests. It is no different from the arguments over advisers seeking to push adverse deals to encourage higher proc fees. The quality adviser will still look at the whole market and compare retention deal with remortgage options. The good news is that many lenders are now prepared to reward advisers’ efforts when the existing lender is retained, so there is a degree of balance.

Are you concerned by the Council of Mortgage Lenders’ figures which show that remortgaging is at a five-year low because of retention strategies? What effect will this have on brokers if the trend continues?

Black:

My concern is that clients may not access the market to check if they have the best deal available to them. The advice market overall will continue to grow as more innovative products open new areas and so good brokers who are adaptable will continue to prosper. The companies which may suffer are those which move clients to new lenders for little client benefit.

Pendergast: It depends on the reason for the five-year low. Certainly, mortgage companies are recognising that it is cheaper for them to retain an existing mortgage customer than to recruit a new one and are pricing deals accordingly.

Admin fees on transfers out of mortgages have had some effect on the market but these have been countered by the popularity of remortgage deals with free legal and/or valuation fees. Some clients have been put off switching due to the time taken to switch and the paperwork involved. Lenders like Edeus are a breath of fresh air as they are extremely efficient and effective. One of my cases took less than a week to complete from application and this kind of new approach and excellent service can only be good for the remortgage market

Lakey: This is at odds with my own experience. It may be that retention strategies are having a greater impact on direct borrowers. The UK mortgage market is fiercely competitive and I have no doubt that lenders will develop new products and tactics to entice borrowers away from their competitors. Unless there are cataclysmic changes, a top-quality adviser can usually source a better alternative. Additionally, with borrowers changing circumstances and sometimes with additional borrowing requirements, it is often the case that an existing lender will prove unable or unwilling to assist.

Three whistleblowers recently claimed that debt collectors are being dressed up as debt counsellors by lenders. Are lenders being too aggressive in chasing arrears?

Black:

If these stories are true and if they indicate a wider trend, then this is a worrying development. When emphasis is being placed on TCF, I would expect this to apply in all circumstances, especially when the client is vulnerable due to difficulties. There is a strong case for centrally-funded advice to be made available to those in financial difficulties, extending the offering of the Citizens Advice Bureaux, to prevent the sharks who circle these people going into a feeding frenzy should we experience an economic downturn.

Pendergast: Most lenders have a policy whereby once a payment is missed, there is a system to try to bring the mortgage back on track and this can only be a good thing for the consumer. No one plans to get into arrears with their mortgage but the involvement of more specialised debt recovery staff who can lay out the options available to the client can only help the client, as long as they co-operate with the lender. Whether this is a debt collector or a debt counsellor is irrelevant. A responsible debt collector should also be acting as a counsellor in any case so, as long as the client is treated well, this should not be an issue.

Lakey: I have no direct knowledge of such tactics and would be very concerned about the ethics of such behaviour although I am aware of lenders which are quick to institute repossession proceedings and then fail to show up at the court hearing. Given the current gong-banging resonance of TCF, I would hazard that this subterfuge would surely fall foul of this principle and thereby encourage FSA attention.

Are you worried by more and more lenders lending particularly high income multiples?

Black:

Yes, if independent advice is not involved. I believe income multiples, in these days of easy credit, should be consigned to the dustbin of history and replaced by straightforward and easy to understand affordability calculations. We always consider affordability when counselling clients as to the level of borrowing they can afford. I can remember only too well the day when interest rates rose from an already high 10 per cent to 15 per cent before falling back to 12 per cent by the end of the day. This was a rise of 20 per cent in mortgage interest costs in one day and, if repeated, few could cope.

Pendergast: This has to happen as the property market shows no signs of recession. A two-bed terrace in the middle of Crewe now costs £80,000. Given historic income multiples, no one earning less than £20,000 would be able to afford to get on the housing market.

Lenders have to be more innovative and flexible or the housing market will dry up and this will lead to problems in other areas of the industry. As long as the client is aware of the risks of not paying the mortgage and a detailed income and expenditure analysis is carried out to ensure that affordability has been checked, higher income multiples will happen as this is the only way that many first-time buyers will be able to get on the ladder.

Lakey: Not at all. It is generally the advice and not the product which is faulty. Lending policy, whether based on income multiples or affordability, is always going to be an approximate arbiter. There are too many unquantifiables which the lender, and sometimes the adviser, will be unaware of. Personal spending habits can affect affordability and are not always measurable via credit scoring. The adviser is often able to gain valuable knowledge regarding mortgage servicing capability and use this to ensure compliance with a lender’s terms. It should be remembered that we are dealing with adults and it is not for advisers or lenders to pontificate if they choose to ramp up their borrowing to the limits. Let us not encourage a nanny state mentality.

Do you expect BM Solutions’ Mortgage-plus product, designed to compete with Northern Rock’s Together mortgage, which lends up to 125 per cent loan to value, to be a success?

Black:

Unfortunately, yes. For the reasons outlined above regarding affordability and resilience to rate rises, I am uncomfortable with this type of lending. It smacks of the late 1980s and the run up to negativeequity problems which blighted so many.

Pendergast: It will be useful for the right client. Until now, Northern Rock’s product has not really been matched by another national lender, so it will be interesting to see if the introduction of competition will have any effect on pricing. If it does, this can only be a good thing for the consumer. This kind of product is useful for those buying properties which need improvement but, again, the affordability issue will rear its head as generally the unsecured portion of the loan can be taken over a shorter term and will therefore place additional strain on the borrower’s budget, especially in the early years. Again, the adviser has to ensure that income and expenditure are checked rigorously before a recommendation is made.

Lakey: I am sure it will prove to be a valuable tool, especially as HBOS has sufficient muscle to make inroads into Northern Rock’s niche area. Nonetheless, it is unlikely to be suitable for that many clients unless we suffer property value deflation. The underwriting for these schemes is going to be sufficiently fierce that only those with high credit ratings will receive the nod.

What has been the most significant or important issue in the mortgage market over the past year?

Black:

The proliferation of call centres, many overseas, cold-calling for mortgages and further damaging the public’s confidence in financial services. This is a direct result of the prohibition on cold-calling by advisers. Instead, we have coldcalling by people who have no understanding of mortgages or the needs of clients and who could not care less about the annoyance they cause.

Clients would be better served and competition would be encouraged by changing the rules to restrict cold-calling activity to qualified and authorised advisers and policing the advice given.

Pendergast: The introduction of automated valuation systems has been a massive step forward and I look forward to many other lenders following suit as this will speed the mortgage process up considerably.

Having said that, my first case with Edeus completed in less than a week and this was with a traditional valuation and a secured loan to be redeemed. So I would welcome the advent of new innovative lenders which challenge the status quo and provide systems which are quick, efficient and, best of all, speed up the time it takes to get a mortgage from application to completion. It should not take between six and eight weeks for a mortgage to complete. If Edeus can do in in a week, so can everyone else.

Lakey: The long drawn-out birth of Edeus was particularly noteworthy but I suggest the mass migration to affordability calculations. This has resulted in an enhancing of borrowing capability which fits in with the property inflation trend.

Some may condemn this as dangerous behaviour which will lead the consumer into ever-increasing debt. However, lenders and advisers recognise that by utilising longer-term fixed rates, affordability can be sustained.

The problem with some affordability calculators is they appear to defy rationality. Some lenders add clarity by advising that a given percentage of net income will be factored while others use unintelligible methods.

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