Can you see many lenders following Nationwide's lead and introducing Cat standards on all new mortgages?
RV: I do not believe it is yet a key selection criterion for the public looking at mortgage deals, particularly when up against some of the strong headline rates available.
ES: It is now 18 months since the Cat standard was first launched and there are still only around a dozen lenders offering a Cat-standard mortgage product. My view is that all lenders who can do so will produce a Catmarked product, if only for the sake of political correctness. The big question is really will anyone buy them? Nationwide's move to seize the high moral ground by using the Cat standard across all new products may prove too ineffective as a selling point.
Most commentators agree that the best deals for borrowers will be found among the non-Catmarked products. This is because the Cat standard exists primarily as a “threshold” standard rather than a stamp of excellence.
Cat standards have little relevance to the prime niche markets that lenders such as Verso operate in, nor to the sub-prime lenders which will be unable to offer the sort of interest rates stipulated by the Cat standard.
AR: Nationwide's move towards Cat-standard mortgages is a significant step from the old school of lending towards increasing transparency in the UK mortgage market. In ess-ence, Cat standards offer consumers a benchmark to make sure they are getting a fair deal on their mortgage – in terms of value, flexibility and quality of product offered.
I would like to think the market is moving in favour of open, transparent products.
Whether we will see wholesale adoption of Cat standards is debatable, however, especially as there is no room for commission for intermediaries. The key features that all lenders should be looking to adopt are things like daily calculation of interest, no extended lock-ins and no mortgage indemnity guarantees as well as appropriate flexible features such as the ability to overpay.
The FSA seems to be taking a softer line on its proposals for lenders to police the pre-sale disclosure of intermediaries. With its requirements published in May, how seriously do you think the FSA is looking at alternative options?
RV: The FSA has been faced with a difficult problem in trying to find a way to discharge the responsibility the Treasury has given it. Passing the responsibility to lenders, while it seems the only thing they can do, has been criticised as unworkable by many parts of the industry.
A good debate on alternatives would be welcome. So far, most critics have simply said it will not work and not how it might work. If the answer lies in technology, as well it might, then the timetable will have to be realistic. September 2002 or even January 2003 would be a challenge to put together a robust, industrywide technology initiative in place and have working.
ES: I suspect not seriously, as it has neither the personnel nor the increased financial resources to do so. It is difficult to comment on it at this stage. The consultation process is still in full swing and we need to see proposals before forming any useful opinions.
AR: The requirement to police the pre-sale disclosure of intermediaries looks like one we are stuck with. It is, therefore, up to the industry to come up with a practical and cost-effective solution. I would hope that the FSA would consider all options that serve to provide complete transparency to all parties involved. That, after all, is the name of the game.
The popularity of flexible mortgages continues to rise. Is it inevitable that all mortgages will display some flexible features in the future?
RV: Since we launched flexible mortgages in 1995, we have been saying that, one day, all mortgages would be like this. Good flexible mortgages offer customers answers to most of the problems with traditional loans, and, as borrowers bec-ome more and more discerning, they will come to expect flexible features as standard.
ES: Until someone comes up with a definitive set of “flexible” features, the term flexible mortgage can mean many things. Around 60 lenders are now offering a flexible mortgage but some do not allow underpayments or lump sum withdrawals, which limits the flexibility to overpayments.
The question, then, is not really about how many mortgages there will be with flexible features but what consu- mers can expect from a product with the label flexible?
In any case, I believe that by far the major element to produce a fairer deal for borrowers is daily interest charging, which all lenders should be aspiring to. The CML is researching the subject of flexible mortgages, so perhaps publication of the research in a few months may help to clarify the subject.
AR: There are a number of forces at work that mean flexible mortgages will continue to gain in importance. Flexible work patterns, sustained low inflation and the increasing uncertainty of modern-day living will mean more and more people will embrace flexible mortgages as a means of managing their money in the most appropriate way for them.
No two mortgage customers are the same and truly flexible mortgages allow for differences that traditional 25-year mortgages never could. According to the dictionary, the word mortgage means “dead pledge” and I believe plain vanilla mortgages offering no flexibility are soon to be dead as a product.
There is a reasonable chance that seller's pack legislation could fail to make the statute book before the general election. Assuming that Labour is re-elected, should the bill be revived?
RV: If the legislation fails to make it before the election, we would expect that a returned Labour Government would seek to bring it back rapidly. Many wheels have been set in motion, particularly in the setting up of bodies to recruit, train and oversee surveyors. In addition, there are a growing number of commercial companies already running seller's pack-type initiatives.
It is worth remembering that seller's packs form only part of the overall proposal that the Government originally set out. On many of the other elements, various parties involved in the homebuying process have been establishing new ways of doing business – web estate agency, online mortgage approvals, online conveyancing, etc.
ES: Is the seller's pack essentially a sound idea for the UK? Denmark is quoted as a successful model but its system of buying and selling property is not equivalent to the UK's. One problem is how fully the home condition report will be accepted by all parties without the additional expense of further valuations.
For example, it has been suggested that lenders will only expect a separate valuation where high LTVs are involved – but how do you know whether it is a high LTV until you value the property?
Another problem may be in areas of relatively low property values where the cost of the pack will be substantial and difficult for people on low incomes to afford up front. However, if the market can accommodate seller's pack costs being paid on successful completion, this difficulty will reduce.
AR: Yes, I think the bill should be revived because the seller's pack is a step in the right direction. It is bound to have a few teething problems but, ultimately, anything that improves the homebuying process has to be a good thing. The seller's pack would be beneficial to buyers in so much as any faults with the property would be highlighted at the start of the homebuying process.
From a buyer's perspective, the seller's pack would introduce much needed transparency into buying a house, especially with the inclusion of the home condition report.
From the seller's perspective, having information up front would improve the marketability of good properties. The pack will reduce the number of transactions that fail due to its transparency, with problems being highlighted at the start, rather than at the end of an elongated buying process.
Interest rates have just been cut again to guard against recession. How can you see these cuts affecting borrower behaviour?
RV: They will be prepared to borrow more as it is cheaper and they will have greater confidence about the long-term outlook for interest rates although there may be some concern over the economy generally and the effect this may have on them. Hopefully, a growing number of borrowers will choose to invest some of their interest rate savings into income protection.
ES: The cut in rates will certainly help to boost confidence but will not immediately enable new borrowers to enter the market, as affordability is based on income and property price rather than the cost of borrowing.
A more significant factor than borrower behaviour is saver behaviour. There is a strongly held view that lend-ers have reached the lower limit of mortgage interest rate cuts because any further rate cuts in savings would see a large-scale exit of savers, thus leaving no funds to lend.
AR: The recent reduction in UK interest rates is definitely good news for borrowers. The important thing is that when rates are cut, they are cut in full and with immediate effect. The recent 25-day delay in cutting rates from the top five lenders has cost existing customers over £20m.
In terms of borrower beha-viour, it is important for lenders to be responsible in their lending given the current environment. People will have an increasingly optimistic outlook and will believe they can borrow more but responsible lenders will always build into their affordability calculations an increase in interest rates.
If a potential borrower cannot afford an increase in repayments of 20 to 30 per cent as a result of an increase in interest rates, then a lender should think twice.
Only 0.5 per cent of mortgages are currently sold via the internet but some observers think this could reach 40 per cent within five years. How realistic do you think this is?
RV: Mortgages will still be complex financial transactions where people need face-to-face advice for many years to come. The combination of internet and face to face will continue to grow. We can already see evidence of many people doing investigation over the net but it will take more than five years for any significant proportion of full sales to take place over the net.
ES: This 40 per cent figure has been proposed by an online mortgage provider so this may be a classic case of “They would say that, wouldn't they?” It is difficult to see where this 40 per cent is to come from – switched traffic from high-street branches? The current small market in phone mortgage sales?. Ten years ago, similar predictions were being made about phone mortgages capturing the market but where are they now?
The proportion of borrowers consulting an intermediary about their mortgage has remained stable at around 50 per cent for many years and I do not think the internet is going to change that overnight. This is the hard core who want to look their loan arranger in the eye when looking at the biggest financial commitment they are likely to make. So, in a word, no, I do not think it is a realistic figure. I think it will be much longer than five years before such a high proportion of borrowers are happy to select a mortgage solely from their computer screens.
AR: The internet will become a very important channel of distribution for mortgages in the next five years. The internet was made for financial services and the technology to facilitate the buying process is improving all the time. This, combined with more and more people logging on, will see a steep increase in transactions conducted online. If our own experience is anything to go by, then 40 per cent may even be conservative.
What it will not mean, however – as some suggest – is that other channels such as the phone will become defunct. People need the reassurance of being able to speak to someone and to this end multi-channel will be the way forward to meet the needs of a diverse customer base.
Richard Verdin, director of housing and protection markets, Legal & General
Eddie Smith, director of business development, Verso
Anthony Richardson, head of business partnerships, Virgin One