Do you think the entrance of the General Insurance Standards Council into the regulatory arena will confuse consumers and make more work for mortgage brokers?
MG: Without doubt. A consumer regards a mortgage as a single product. However, a well constructed mortgage by a professional mortgage broker will consist of a number of elements. For example, one, the loan itself, two, a repayment vehicle (Isa, etc), three, term insurance, four, buildings and contents insurance and, five, ASU.
This package is regulated now (with the advent of the GISC) by no less than four different regulators, namely, the PIA, the MCCB, the GISC and finally the Consumer Credit Act enforced by trading standards. A consumer with this pile of fact-finds and information from different regulators could be excused for wondering what on earth is going on.
DG: Yes. While I applaud the principles behind the formation of the GISC, I believe it may well lead to additional work for mortgage brokers and confusion for the customer. A lot, of course, will depend on the approach taken by the GISC and I welcome its assurance that it will be a pragmatic one.
However, my real concern is the fact that intermediaries are now regulated by the MCRI for mortgages, the FSA for life insurance and the GISC for non-regulated insurance products. Are we in danger of driving the small to medium-sized mortgage broker out of the market by increasing the admin burden and financial costs of compliance? I hope not.
Mortgage brokers are the lifeblood of the industry and their demise would lead tothe market being dominated by a few bigger organisations, restricting choice and valuefor the borrower.
AG: The purpose of the GISC is to focus on the needs of the consumer. The object of the exercise is to make it easier for consumers to make informed decisions and to be in a position to make a complaint if the need arises. The fact that mortgage brokers will have to bring in a formal approach to regulation into a field that was previously unregulated will undoubtedly mean more work for many. The new regulated approach is no different from the way the best mortgage brokers have been conducting good business practice in the past. The Woolwich has consistently supported the GISC from the outset.
Should mortgage brokers be paid renewal commission on mortgages?
MG: I will probably get castigated by my entire broker customer base because my answer to this is no. If this practice becomes widespread, it could potentially lead to an anti-competitive two-tier mort-gage product structure. If lenders pay renewal commission, the money will have to come from somewhere. That somewhere will undoubtedly be the consumer.
The two-tier product structure will then arise as lenders introduce more “direct” products to compete against “introduced” products with different pricing. If this scenario happens, it will ultimately lead to damage to the broker marketplace, short-term gain leading to long-term pain.
DG: Yes but we should all recognise that it is the borrower who ultimately pays commission. Renewal commission assists lenders in retaining customers, a key goal in any business. It is only right that mortgage brokers who refer loyal and profitable borrowers to a lender should receive grea-ter total commission than the intermediary who “churns” borrowers to other lenders.
The current industry practice is to pay up-front commission. If the structure of commission is to be reviewed to include an element of renewal commission, brok- ers must be prepared to receive a lower up-front payment but ultimately more com-mission over the life of the mortgage.
AG: There are arguments for and against renewal commissions. We believe that most mortgage brokers are happier being paid a full procuration
fee at completion. One possible implication of renewal commission is that the up-front fee would reduce as the cost to the lender administration increases.
In the case of renewal commission, an argument could be made for the introduction of clawback conditions in certain cases. It may be that renewal commission would not be the choice of many mortgage brokers.
Has the housing market peaked?
MG: Only in the short term. The current slowdown in the market is the response to the Government's recent fiscal policy. The removal of Miras is only four months old, as is the increase in stamp duty. The removal of the married man's allowance and even the increase in petrol tax which has been calculated to cost Mr Mondeo Man nearly £250 a year (£20 a month).
This alone would finance £3,000-£4,000 on a house price. All these policies have combined together to remove money from the consumer that might have been spent on housing. However, house prices are closely linked to inflation and, as the UK economy still has an element of inflation, this will be reflected in house prices inthe long term.
DG: Yes, it almost certainly has for the present in London and the South-east. Outside these areas there is still scope for house prices to rise, especially in those areas which are still recovering from the price falls of the early 1990s. The peakin London has been caused by the base-rate increases of the past 12 months, the rem-oval of Miras and the negative publicity generated by the national media.
This has led to a reduction in confidence and, ultimately, a reduction in the number of first-time buyers entering the market. However, the recent stability in market rates added to the increasing likelihoodof a UK entry to the euro will, I believe, restore confidence and lead to continued growth in house prices.
AG: It would be wrong at this stage to make the judgement that the market has fully peaked. There are still a number of hotspots, especially in the South-east.
However, Ekins (The Wool- wich's surveying arm) reports there are a number of signs that indicate a softening in the housing market. The signs are increasing – estate-agency boards outside properties, an increase in the volume of property available in the market and an increase in the number of comparable properties that are available for the surveyors to benchmark property values against.
There is also a feeling that there is more realism in pricing. It will be another few months before we will be able to say for certain whether the housing market has peaked.
Are loss-leading rates making for a turbulent market?
MG: Yes, I think so. But this will be a short-lived exercise by the lenders. Loss-leaders rely on consumer apathy not to switch providers when the rate is nudged up. However, consumers are getting smarter.
Switching mortgages is getting easier and easier and this process will accelerate as use of the web matures. Lenders will slowly come to realise they can no longer rely on apathy to return profits over the long term and will probably revert to extended tie-ins.
DG: Yes. All businesses need to make a reasonable profit and a return on the capital employed in the business. If a lender is marketing a loss-leading mortgage product, you can be sure the same lender is marketing another product or products to cross-subsidise the loss.
The majority of loss-leading products available are targeted at prime borrowers, typically those with a good mort- gage record and substantial equity. No lender can offer loss- leading products to all its borrowers and it is not necessarily the most deserving borrowers requiring help to enter the housing market that have access to these exceptionally competitively priced products.
This results in a hugely competitive and active refinancing market, which leads to churning and margin loss for all lenders. No one wins in these situations and the consumer ultimately bears the cost. This causes turbulence simply because the practice is unsustainable in the long-term.
AG: In a market as competitive as the mortgage market has been in the past few years, aggressive competition can only be expected. The introduction of new players, the development of new channel such as the internet plus WAP phones and the rise of the flexible mortgage have led to a very fast moving market. The net result has been a relentless drive for innovation and the design of products with benefits to the consumer wider than the price dynamic.
Non-mortgage-based products have been brought into the product design through offerings such as the Woolwich's Open Plan Offset mortgage which mean those with borrowings and savings are receiving a far higher effective rate of return by offsetting their savings against their mortgage.
Why do you think the buy-to-let market is still so strong?
MG: If the UK joins the euro, interest rates will drop to around 4.5 per cent which will trigger the big- gest house price boom the UK has ever seen, linked to raging inflation. Ifyou do not believe this, just take a look at what has happened in Ireland.
Any smart investor who bel- ieves the UK is going to join should mortgage himself to the hilt on buy-to-lets. The actual mortgage debt in real terms will be reduced dramatically by inflation. House prices and linked rental returns will keep pace with inflation. Of course, if you buy into a tracker-type mortgage, the provider will not be able to increase the SVR because it will be locked to a bank rate decided by the European Central Bank – wow, a licence to print money.
DG: UK housing will always be a good long-term investment. The buy-to-let market is remaining strong because it is an investment whose performance is very easy to understand with both a short-term (rental yield) and long-term (capital appreciation) return.
The market has also benefited from the increasingly flexible mortgage products offered by lenders that underwrite the property's ability to generate rental income. Up to relatively recently, this market was the preserve of the established high-street banks and was restrictive and uncompetitively priced.
Competition in the market has given more and more people the opportunity to put their capital into the housing market and avoid the uncertainties and relatively low returns now being offered by more traditional savings and invest-ment products. These low returns are set to continue as we move towards an even more uncertain interest-rate environment, hence the buy-to-let market will continue to offer an attractive alternative.
AG: We continue to experience strong demand for private rented property. There are a number of reasons why the buy-to-let market is remaining strong, not least that buy-to-let remains an attractive long-term investment with possible capital appreciation and tax breaks.
There is still a shortfall of quality rented property in the right location and there have been widely publicised reports that there will be a housing shortage going forward for a number of socio-geo-demographic reasons. It should also be noted that the UK still has the smallest private rented sector in the Western world.
Should the DTI recommend banning compulsory tie-ins of home insurance for mortgages?
MG: Yes. The name of the game at the moment whenever you pick up any newspaper or any communication from the CML or the MCCB is that clear understandable infor-mation should be provided for the consumer.
This even extends to brokers telling the consumer the fee the provider is paying the broker. It therefore makes no sense that a product provider can bolt into the lending product a profit element that is not disclosed to the consumer. It is also widely recognised that the compulsory insurances are probably the most expensive on the market. Removal of these compulsory tie-ins would also open the market for insurance providers to compete on a level playing field and reduce costs to the consumer.
DG: Yes. There should be product transparency so that both mortgage broker and borrower can easily compare the true value of competing products. It would be outrageous if a car dealer gave you a great deal on a car so long as you agreed to buy petrol every week from their forecourt. But this is similar to what is happening with compulsory tie-ins. Coupling products together also increases the risk of the borrower being missold a product. The mortgage product may be best advice but it is not necessarily. Banning such practices can only benefit the consumer, encouraging greater competition in both the mortgage and home insurance markets.
AG: Consumers should not be required to buy a particular type of insurance from a particular supplier as a condition of obtaining a specific mortgage type. While introduction of a new power to ban the sale of tied packages could be contained within the proposed Consumer Protection and Fair Trading Bill, there are alternatives available that could be incorporated within the Mortgage Code of Practice. It could also be covered by inclusion within a specific Cat standard.
Mike Green,Director, Mortgage Brain
David Guinane,Managing director,Capital Home Loans
Andy Gray, Senior product manager, The Woolwich