Funding difficulties and pressure from the regulator is causing lenders to re-evaluate their distribution strategies at the expense of directly authorised mortgage firms.
The last two weeks have seen NatWest temporarily restrict DA access to its corporate range of mortgage products and Nationwide Building Society cut its procuration fees for DA firms, which Money Marketing understands has been lowered from 0.35 per cent to 0.33 per cent.
Mortgage experts fear the combination of tough funding conditions and the FSA’s thematic review into mortgage fraud could see lenders restrict product choices or cut proc fees for directly authorised firms until the mortgage market recovers.
Libor, the rate at which banks lend to each other, has fallen slightly from a peak of 1.09 per cent in January to around 1.02 per cent at present but this is still historically much higher than before the financial crisis, when it was normal to see a spread of around 15 basis points between bank rate and Libor.
Lenders also have to compete with each other for retail deposits and securitisation activity is significantly lower than its precrisis peak.
The FSA conducted a thematic review on mortgage fraud against lenders in June 2011 which found that lenders must “take steps to satisfy themselves of a broker’s suitability on an ongoing basis”. This has had an effect on how lenders distribute mortgages.
DA firms could be targeted by lenders as it is harder to conduct due diligence on firms that are not part of a bigger network.
PMS chairman John Malone says: “Funding will become an increasingly crucial issue and we will find some lenders will have to alter their strategies. DAs will always be in a vulnerable area because lenders cannot control DA activity like they can with a network firm.
“Clubs are working with lenders to get the best outcome they can for brokers but it is a very challenging market. Until the funding situation improves and lenders are out there lending, then I am afraid we are going to see a lot more of what we have been seeing over the next few months in terms of access to products and fee changes.”
Others feel lenders will target smaller DA firms, as it is harder to conduct checks on these firms than it is on established national DA brokers such as London & Country and John Charcol.
John Charcol senior technical manager Ray Boulger says: “I can see small directly authorised brokers will get squeezed, primarily because of the FSA putting pressure on lenders to know their brokers.Networks take responsibility for an appointed representative firm’s compliance and all the lender has to do is to do its homework on the network and not a load of small firms. That said, the same can be said about some of the larger DA firms, which are around the same size as some of the smaller networks.”
FSA figures show there are 1,512 DA firms conducting mortgage broking as the main part of their business, compared with 2,425 AR firms.
Legal & General Mortgage Club managing director Ben Thompson is urging lenders to acknowledge that smaller DA firms also submit quality business.
He says: “If funding remains challenging, it is going to be difficult for lenders to sustain their support for the smaller DA broker, although a lot of these firms are extremely experienced, have good advisers and often originate good quality clients, so lenders need to be careful before taking any crude measures against these firms.”
Personal Touch Financial Services sales and marketing director Dev Malle says lenders’ re-evaluation of their distribution methods might not only affect DA firms. He says: “Lenders have got limited funding at the moment and you have the FSA’s thematic review on distribution and the responsibility placed on lenders to source income verification as part of the mortgage market review.
“I do not think it is just DA firms but the smaller networks which might suffer as well.”
London & Country associate director of communications David Hollingworth says: “Firms have to decide how best they can continue to provide their service to clients in the future. If they feel they are not generating enough income or are unable to provide the same level of service to their customers then clearly they will have to look at whether it is worth staying as a DA.”
But Association of Mortgage Intermediaries director Robert Sinclair believes the quality of business that firms submit will be a much more important determining factor when lenders consider who they chose to distribute through.
He says: “I think the issue is much more about quality of business as opposed to it being a blanket issue for all DAs. If you take the larger DA firms, the quality is very high and they have got good relationships with lenders, so I cannot see things like this affecting them.
“I think the quality of business will become more of a determining factor in the near future when lenders decide who they will deal with and what those firms will have access to, particularly as the FSA is increasingly telling lenders they should know who they do business with.”