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Chilton on Mortgages

We are in the closed-period run-up to M-Day, the cracks are really beginning to show in certain of the market&#39s participants&#39 systems.

We have seen at least two lenders effectively withdraw from new lending to enable them to focus on getting their systems and particularly KFIs ready for M-Day. Nationwide is not taking on any more new direct intermediaries at present as it battles its own demons on the way to M-Day. Further groups of lenders say their next product launches, due in the next couple of weeks, are likely to be the last ones until M-Day.

All of this shrieks of lost opportunity. Nationwide has some attractive product offerings in certain sectors and its distribution stance will damage the potential sales.

The clarity with which the house price slowdown is being marked by the indices means the necessity for further interest rate increases is disappearing. I anticipate this will have an effect on two and five-year swap rates, letting market competition in this area drop well below the 5 per cent benchmark level for two-year fixes. Those lenders which can follow the yield curve down will win.

Even once the KFI programming problems are solved, there is going to be a very significant ongoing load on product maintenance. The KFI is so much more detailed in its disclosure that the data requirements to generate a compliant KFI for an individual product are probably at least double those required for a conventional illustration.

This is going to put a load on any providers of KFIs, from lenders through sourcing systems to intermediaries who choose to produce their own. I expect the problem to be felt hardest at the sourcing system level, where the sheer demands of updating significantly greater data sets for each product, will change the cost dynamics of these businesses and potentially lead to further consolidation.

Talking of consolidation, as I write this piece, the market is pushing up the share price of both Bradford & Bingley and Alliance & Leicester. The story, which you will already have heard by the time that you read this, is that Santander Central Hispano is turning its attention to these two targets in the belief that it may lose out to HBOS in the Abbey takeover saga. I think the market sentiment may for once be right and these two targets, for differing reasons, could be far more attractive to Santander. To achieve scale, it might want to go for both.

The next challenge is the new advertising regulations. For most advertised mortgage products, we will have to show three rates with “equal prominence”. Just how the FSA interprets this will only be tested by people getting it wrong and I guess most players will adopt the safe course of giving all three rates equal prominence. This is likely to lead to consumer confusion and a drop in the efficacy of rate-driven advertising.

Perhaps more of a challenge is the clarity with which an intermediary&#39s fee proposition has got to be stated. It is very clear that this can no longer be put into the fine print. For the small group of elite high-end brokers such as Savills, Chase de Vere and Hamptons, this should not be an issue as their fee-based proposition has always been extremely clear.

What price, however, clarity for that big London-based intermediary, which boldly proclaims in its advertising to be fee-free and then in its small print only says that is fee-free for house purchase transactions? What about remortgages and buy to let, which make up a substantial proportion of its business? Can it really continue to claim to be fee-free?

All these issues will take time to calm down and the serious players will find their way through the myriad of challenges, which face us over the coming months. And the Spanish are definitely coming, it is just a matter of which Northern city the Armada lands in.

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