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Cascading cases

Our panel assess the potential perils of sub-prime and the search for deals after a client comes down from the prime stream

The Panel
Alan Lakey, partner, Highclere Financial Services
Tony Catt, IFA,
James Carter, IFA, Virtue Financial

Is the growth of the sub-prime market fuelling rising repossessions, as the CML has indicated?

Lakey: Obtaining mortgage finance has never been easier. Generous multiples or affordability calculations and the additional ability to self-certify income have smoothed the path. Additionally, even the most frightful credit record is no barrier with some lenders.

Lenders are generally protected by the spare equity but it is no surprise that somebody with a history of financial fecklessness should default again. By enabling the bad-risk client to borrow, it is logical that arrears and repossessions will follow.

Catt: I believe the sub-prime market is growing because of the amount of debt outstanding and not being serviced. Repossessions are increasing because of the amount of this debt rather than the growth of the sub-prime market.

Indeed, some lenders have found that their sub-prime book is easier to manage than mainstream as people who have had problems are more careful about their future.

Carter: Possibly, but there are two questions to ask here. First, what was their situation prior to them taking on the mortgage? A sub-prime mortgage can be very helpful in a lot of instances. For a sub-prime mortgage to contribute towards a repossession, it would have to be right at the heavy-adverse scale of the market and the growth I am witnessing is at the lower end, which is where the likes of Accord have entered the market.

Second, while these mortgages are provided by our industry, so long as due care has been taken in line with the FSA’s TCF principles, we should not forget that caveat emptor applies.

Are brokers becoming lazy by not searching for a better deal once a case has been cascaded down from prime to sub-prime?

Lakey: There may be that temptation, particularly if the decision has resulted in a hard footprint on the credit record. But there may be occasions when a case is bumped down the food chain by information obtained later during the processing.

On occasions such as these, it is sometimes better to proceed with the “agreed” loan rather than starting again from scratch. With fixed and discounted rates on the rise, a bird in the hand may be the best option.

Catt: When I have a case that has failed mainstream, I will always try to find the best sub-prime deal available. Most recently, I have used packagers to undertake this research for me as they are better placed and they have a credit reference to work with while I do not have this information to hand.

Carter: The cascading system does lend itself towards a quicker mortgage lending decision for clients, which quite often is their priority. But, as brokers, we are aware that if a product is cascaded, we should look to research a case further. I am sure the majority of brokers do this. But the advantage that the cascade system has it that it accounts for every little piece of credit bureau information which we brokers may not have obtained from clients and would therefore be more accurate than any sourcing system as they have real-time data.

Is RBS Intermediary Partnerships truly committed to intermediaries, after stating in its interim results that it has “stepped back” from the broker market?

Lakey: RBS has made this statement but I have seen no evidence, other than its decision to move out of the self-certification market. The four brands still seem unfocused and each has a differing lending policy but I have found them to be more competitive during the last 12 months than any other.

I believe that most advisers share the view that lenders with branch networks will try to maximise profits by cross-selling other products and that they try to balance this against their need for volume.

Catt: RBS Intermediary Partners would appear to have shot themselves in the foot as far as I can see. They have amalgamated all the brands rather than being able to attack on several fronts. This, combined with unexciting deals, means that they probably get less business from brokers than the individual brands have done in the past.

Carter: There are enough big lenders involved in the intermediary market for us not to worry about this too much. Its rates are rarely top of the tables anyway. RBS spent years desperately trying to tempt brokers with big procuration fees and that did not work. Stating its intentions in its interims is pretty unambiguous.

The problem with RBS is that it is making such vast profits that it may think it does not need the intermediary sector as much but when those profits take a downturn they will then come back to their most efficient distribution for mortgages – intermediaries.

What effect will there be on the mortgage market with the Government’s decision to make home condition reports in Hips voluntary?

Lakey: Many buyers are put off moving by the costs of stamp duty, estate agents fees and legal costs. The added aggravation and additional cost of a home condition report was likely to reduce sales which would therefore have reduced purchases.

Making it voluntary is the same as making pension membership voluntary, it reduces the likelihood and ultimately nobody is likely to bother. This, perhaps, is not a bad thing because the aim should be to reduce the paperwork, red tape and form-filling which occupies so much time and adds to the overall cost.

Catt: Hips were a well-meaning idea produced by people in Government which does not really understand how the housing market operates. I have noticed that making things voluntary means that most people will not bother. Therefore, it will have little effect on the housing market.

Carter: Yet again, the Hip debate, like so many before, has proved to be financial journalists’ column-inch producers and very little else. Surely, the Government should just have simply complied with new EU regulations rather than trying to revolutionise the buying process.

Rant over, I see HCRs having very little effect on the mortgage market, especially now they are voluntary. Even if they were compulsory, lenders would still want to value a property before they secure their loans on the property and who can blame them?

Any attempt to increase the energy efficiency of our homes should be applauded but the bulk of legislation should be aimed at those building new homes.

Do you expect more lenders to follow the examples of Accord, Woolwich and HBOS in offering retention incentives?

Lakey: It has always fascinated me how a lender such as Halifax could blatantly offer poorer rates to existing customers – loyalty should be rewarded.

By offering retention incentives to advisers, lenders will certainly increase their retention rates but ultimately the decision will not be based on adviser remuneration but on product and rate quality.

An example here is Nationwide, which does not provide retention incentives but continues to offer quality products to borrowers old and new. Lenders offering less savoury products are more likely to resort to broker retention incentives.

Catt: I think that lenders should offer retention incentives. Often, just as much work is undertaken in order to ensure that the customers are getting the best deal. So, it is fair that brokers are paid for undertaking the necessary research.

Carter: I take my hat off to these lenders for finally making some attempt to retain customers. I hope that more lenders realise that having their name in the mix when it comes to remortgage research is going to gain them a significant amount of business.

I have found the Woolwich system to be excellent and it is working extremely well for my clients and also to an extent for me. There is a parallel with the cascade lazy question here and full research and precise calculations are needed to ensure the best deal for the client is obtained.

Will the FSA’s call for dabblers in the equity-release market either to refer business or get out of the market solve many of the advice issues in the sector?

Lakey: In short, yes. In this regard, equity release is no different to pension transfers, critical-illness insurance and income protection. If you are not proficient, get out and keep to those niche areas of competence.

The FSA’s advice is sound but it has been beaten to the line by Ship members voluntary decree that from August 2007 they will only accept applications from advisers qualified in the lifetime mortgage module.

Very few small firms have the skills or the necessary time to become fully versed in all aspects of financial advice and it is time that the industry wised up to this fact.

Catt: I believe that anybody operating in any market should be able to demonstrate expertise, either academic or practical in order to ensure that the quality of advice is maintained at a high level.

The equity-release market is complicated because it involves advice to an often vulnerable sector of the population. Therefore, I feel that it is crucial that only expert practitioners should be advising in this market.

Carter: I think they are right in this area. I presently refer business but will be sitting the IFS’s equity-release exam next year before entering the market.

It is not the most complex are in the world but it is a very emotive area involving not only the client themselves but their beneficiaries and that is where the problems lie – getting a complaint in 20 years time from disgruntled children bereft of an inheritance.

It is a specialist area and should not be skirted round, so I think referring or specialising are indeed the only two options.


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