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Chilton on Mortgages

We never seem to learn from experience.The Bank of England’s November mortgage approvals for house purchases shows a 10year low and everybody is interpreting this as a sign of a calamitous drop in property prices.

Yet if you chart the last property crash, you will find that while transaction volumes tumbled, this led to a situation where the only real deals were by various forms of forced seller.

Prices, as compared with values, were artificially depressed for a period of time as other individuals became reluctant to move. But once the hiatus was over, the underlying values reasserted themselves and prices returned to their long-term trend value.

Exactly the same is likely to happen through this cycle, with one major exception. The big factor is that there are far fewer forced sellers around this time round. Repossession levels are not rising significantly, employment is fuller and interest rates are still low. Fewer will want to crystallise losses. Yes, we will see a drop in apparent prices over the shor-ter term but real values will not be impaired significantly.

The lessons of history can also be picked up from the FSA’s warning to insurers on their treatment of endowment misselling. The real criticism should be levelled at the vast majority of the institutions which failed, when interest rates and yields declined, to tell their clients to use the savings that they made on interest cost to accelerate the repayment of their mortgages.

I have changed my mind, and now believe the FSA is right to criticise the industry. I just hope that this lesson will be learnt by the regulator so that it focuses its attention in the new regulated mortgage regime on preventing misselling scandals rather than shutting the door after the horse has bolted.

In this area, the highest risk exposure must be in sub-prime. We have recently been carrying out a test on acquiring sub-prime leads from a number of internet sources. Some 12 years ago, we carried out research that showed that customers’ perception of their credit standing was almost always worse than the reality. It appears that the same situation persists today.

For the vast majority of the sub-prime leads we have acquired during the test, the customers are capable of being placed with mainstream lenders at normal interest rates.

It is not the lead generators that are at fault here, it is the customers who are self-declaring themselves as more adverse than they really are. The real misselling exposure arises with such individuals. The internet-based lead generators are a powerful source of business for sub-prime specialists which inevitably place the customers with a sub-prime lender at premium rates of interest and normally charge a sub-prime broking fee.

What fascinates me is that although the FSA has indicated its intention to look at this area, how will it go about it?Given the power of its publicity engine for historic issues,I think it is time that it put out a public health warning.

Don’t get me wrong, the sub-prime market is necessary to provide finance and credit rehabilitation to a certain sector of society but our recent tests lead me to believe that significant levels of business continues to be missold on inappropriate products.

And as to mortgage volumes, although both the Council of Mortgage Lenders’ actual November lending and the Bank of England’s approval data for November show a steep downturn in house purchase levels, the level of remortgage business remains buoyant. Sure, equity withdrawal, as confirmed by the bank, is significantly down but in Britain we have bred a nation of serial rate-hungry remortgagers and the opportunity for the industry lies therein for the year ahead.

Mark Chilton is chief executive at Purely Mortgages

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