The FSA has published its review of its handling of Northern Rock which concludes that there were some failings on supervision. Where do you think the blame lies for Rock’s demise?
Well, we have to break it up into two stages really. The first one is the recognition of a problem, the identification of a problem, and the second one is dealing with that problem once it has been identified. The FSA have to take the lion’s share of the blame for the first stage.
They were supervising Rock and according to regulations should have been watching liquidity, working with the Rock executives, given the circumstances and given their peculiarities of securitisation and the extent of their lending. So the FSA has to take almost total blame for not identifying the shortfall in funding or the risk to the shortfall in the funding to Rock earlier and not working with Rock to have a better back-up plan in place in the event of what happened.
But I think once the problem came to the surface, the FSA really took a back step, quite rightly, and it then fell to greater powers, those being a combination of the Chancellor, the Government, obviously the Treasury to a degree and the Bank of England as well and at that point, I don’t think the FSA can be blamed for an awful lot. It obviously advised but did not take an active part in putting in place a solution.
Just to recap, it takes the flack for the first stage. The second phase falls into other areas specifically led by the Chancellor.
The FSA has said it will increase the number of staff employed to oversee “high impact” firms. Will this make any difference long term? Is greater supervision the answer?
No, it is definitely not the answer. I know from our perspective, as a fairly large broker firm, and talking to other people in the mortgage market that an awful lot of the supervision is a case of dotting the i’s and crossing the t’s rather than really getting underneath the commercialities of the business, how it is operated, the real risks to the business. It needs to be done on a more intelligent basis rather than paper pushing. More people working on the supervision side, people in large banks such as Rock, that just create more paper to be pushed.
What was your overall impression of the Budget relating to housing and mortgages?
It was a smokescreen of beer and fags. There was nothing of relevance even to remark on or talk about in relation to certainly the mortgage market. In relation, the way the Bank of England is handling the current situation, the Government is just hoping it will go away and the Budget was a very clear sign of that. It was focusing on other things and not really worrying about what it should be worrying about.
What do you make of the Government’s working party to look at the issue of mortgage funding? Is it too little too late?
It is certainly going to be too late by the time the working party recognises it and the way that it was launched was in a very negative sense. The name sounds aspirational, to achieve a level of quality, but the way it was raised and launched was negative, trying to prevent something from happening. Therefore, it is going to be negative in view when it comes out so it will be too little too late.
Very few commentators have come out and publicly praised the UK lenders for managing to avoid some of the problem that exist in the States. The quality of the books of most of the UK mortgage lenders, non-sub-prime, are good and even the sub-primes are better than they are in the States. So it seems to me to be a Government-led initiative to take it to general financial experts but without embracing the people that have ended up limiting the damage to the UK market because it would be very easy to replicate what the US has done.
Just how bad is the credit crunch for mortgage lending at the moment?
Well, the first thing to say is that the sub-prime market has dried up so the consumers who have taken out a sub-prime mortgage over the last two to three years at a high LTV have very few options. The impact on them will obviously be felt on a monthly basis, paying the mortgage at a higher rate when it switches to the SVR. Being very broad, the mainstream market, I include within that sub-prime to a degree and buy to let anything 90 per cent or lower, there is a very good home for it. The rates are obviously not what they were but they are competitive. It is trying to just find mortgage solutions for consumers that are looking for 90 to 95 per cent LTV.
We have seen a couple of lenders formally withdraw from some market sectors and some, like Advantage, withdraw completely. Do you expect more lenders to close for business?
There will be greater consolidation over Q2 Most commentators, myself included, expec-ted us to see a slight easing of the situation in quarter two. I don’t think that is now going to happen and therefore, those lenders that had planned on the basis of a slight easing in quarter two and a better market in the second part of the year are probably expecting now for the situation to exist for the rest of the year.
The same is true of the broker community. Most brokers were expecting the cycle to be as I just described, the same as lenders were predicting, with a slight easing in Q2 and those brokers that do not have established, profitable business models are going to find it more difficult to continue to do business across the rest of the year.
Are there any signs that the difficulty in mortgage financing is starting to affect the house purchase market?
This is a very complicated subject. Despite the interest rate cuts that the MPC has made since December, consumer confidence remains low and the Bank of England has not been pro-active in managing the situation to ease consumer confidence or to ease up the liquidity in the market. The largely unreported positive moves taking place in the States and also the largely unreported but positive moves in the rest Europe have allowed Abbey and Bank Santander to carry on lending at that sort of level plus other lenders. This country has just been fundamentally slow. The Bank of England has managed it at a snail’s pace.
The Northern Rock situation has contributed to that and there is no doubt that they are more concerned about moral hazards than they are about being positive and sorting out the market. But we are long past the moral hazard now, that has gone, it was a one-off with Northern Rock, they’re still taking the old fashioned, rigid, anti-inflation view and it has got to share the responsibility with the Government taking a more proactive approach to sorting this out.
There is money out there people still need to buy and there is not enough houses but they are worried at the moment that they are going to end up in a negative equity situation and consumer confidence is low. If we go into recession, it will indeed be because of the policy of the MPC. We should not go into recession but if we do, that is where the blame will be.
Do you think they should be much more pro-active in cutting interest rates further?
Yes. Mervyn King seems to be obsessed with the need to have to write a letter if inflation gets above 3 per cent. There are greater things at play here, we could end up in recession rather than being stuck to an anti-inflation mandate. They need to make some bold changes to be able to loosen the market up. Not for it to run away silly but to get back to a stable position, otherwise recession will come.
Alexander Hall recently went through a change in ownership. Has that changed the business?
No, it was very smooth and I am pleased to say that our new owners BC Partners bought into the management team of Foxtons and Alexander Hall, bought into the strategy and the ownership has worked fantastically thus far, allowing us to get on and manage the business on a day-to-day basis and being able to execute the plan that they initially brought when they bought the business. So it has worked out very well so far.
How important to Alexander Hall is the link with Foxtons?
Foxtons are London’s biggest estate agent and off the back of that introducer, Alexander Hall has grown into what I believe is London’s biggest mortgage broker so one follows from the other really. Whatever business model you have, you need to adapt the business to be able to suit the introducers you have. I mean, that’s your primary source of leads.
With us, we work with one introducer which is Foxtons. You need to be able to supply the service that it needs in order to be able to manage its clients and if it is one large introducer, it has more ways that it can go wrong rather than lots of little introducers where poten-tially you are not putting all your eggs in one basket. So it brings with it problems, it brings with it opportunities. Thankfully, we are making more from the agency in terms of prospective leads and working with them on a positive basis than we have ever done.
What percentage of your business do you get through the estate agency?
About 70 per cent of our business will originate from Foxtons. It doesn’t necessarily mean they are buying through Foxtons but they have been looking at Foxtons properties and have decided to talk to us about the mortgage. So origination would be that. In terms of clients that go ahead and buy through Foxtons would probably be about a quarter.
You also offer advice on overseas mortgages and offshore mortgages, is this an area that you think is going to grow?
We are focused on the UK market and so our overseas is very limited. In order to have a successful move into Europe, you have got to have introducers established in the countries you move into, that is the key to it. You can buy those introducers but I think it comes at a cost. The culture is different, you’ve got to establish a local team, it is quite hard work. At the moment, there is enough in our strategy for us to execute a plan just growing on our London and South-east England business that we are not looking for that at this moment in time. International mortgages are always something we will do, different currencies, etc, that’s fine, but overseas is not a key part of our strategy.
Although you are very much focused on London and the South-east, what is your take on the state of the housing market? Are London and the South-east holding up better than the rest of the country?
The evidence I see proves that is the case, certainly at this point in time. But that has always been the case. When there has been massive growth you tend to find London leads the way and parts of the country will then grow off the back of it. When there is a downturn, other parts of the country tend to go down qui- cker and London takes longer to come down and that is just supply and demand. It is good at this point that London is as it is because otherwise there might be a bigger drop in property values across the UK, so London and the South-east generally are helping the situation.
How is Concordia going so far?
Concordia is now about 15 months in operation and for us it has worked fantastically well. It is not a front-page story by any means, in a sense of it was never something that we were looking to talk to the press about and attract new members. It was primarily a banner under which we were looking to work more closely with our key lender partners. In that sense, the lenders have found it very useful. It provided a focus to discuss and negotiate terms, service and products with us and it has just provided tremendous opportunities for them and for us. It is a very different model to the other models that are out there in the market, which is why it probably caused a bit of a stir at the start but it has settled down very nicely.
You said there was no intention to grow it past the original membership. Is that still the case?
It is a case of never say never. You never know how the distribution landscape is going to change so you can never say never.
Are you seeing a downturn in the numbers of people approaching you for
At the moment, we have had a very marginal drop-off, only a couple of per cent drop-off. So we are still seeing very similar levels of people to review their mortgage options as we did last year. What is happening now, however, is more of those clients are deciding to wait a bit. They take our advice but they are not going through with the transaction. The remortgages are being dealt with but with new purchase, we are still dealing with a fair proportion of them but some clients are saying that’s great, I am keeping an eye on that but I just want to wait a month. Sometimes, if they are in the buying cycle, they see the property they want and go for it but otherwise they have got a choice now and they are taking their time.
At the moment, we are seeing the same numbers of people but it is a more drawn-out process.
If the numbers of house sales drops, will we start to see either redundancies or people leaving mortgage broking voluntarily?
The answer has to be yes. It comes down to business models for mortgage brokers, the mortgage market gener-ally but also the mortgage broking market has grown over the last three years and although some of those business will have been making money, this is at the top of the market. It comes down to what will happen to those businesses when it gets a bit tougher? Less business going through, perhaps being paid less by the lender? And if the business model is not established and proven to make money, then obviously somebody suffers.
You mentioned earlier that you are planning to expand Alexander Hall. Is that regardless of market conditions?
Well, it is not regardless, you just look at your leads. Foxtons has still got 500 negotiators in sales and lettings and it is purely a case of us looking at the number of office we have, the number of teams and the number of brokers I need. We have got a very strong trainee broker scheme where we take trainees without any CeMAP qualification at all and we take them through a year-long training programme. I have still got over 50 trainees. Obviously, not all of those are going to come through but I have enough advisers to grow this year at what- ever rate I want to grow at. So it is a question of just looking at your introducers and your leads and matching up the number of adviser to that. We have new offices planned for this year as well, new Foxtons offices that will have Alexander Hall brokers in them, so they are opportunities for us as well.
You’ve said what you hope the Bank of England will do with interest rates but what do you expect them to do?
For the first time in a long time, the level of interest rates is slightly immaterial for the rest of this year. I think they will come down, conservatively two .25 per cent cuts across the rest of this year. But I would like to see a more proactive approach which is less around managing inflation and more around in the short term, loosening up the liquidity crisis by sorting out medium-term funding, addressing Libor and ultimately helping consumers in terms of either remortgaging or new mortgage solutions for purchases, to be able to move and transact. Interest rates will come down but I would like to see them dropped, as they have in the States, by a fairly sizeable chunk and have liquidity being pumped into the market.