How do you feel the mortgage market will shape up in 2006?
Cornell: I think that 2006 will be a good year for the mortgage market. Consumer confidence in the housing market seemed to be higher towards the end of 2005 and I am sure that an impending base rate cut will help stimulate this. By now, regulation is part of day- to-day life and does not inhibit business.
I expect the FSA to play a much more public role and for us to see some public hangings of miscreants.
I think we will see more lenders announcing retention strategies and hopefully starting to work with brokers rather than cutting them out.
Hollingworth: With a very strong finish to 2005, hopes were high for a bright start to 2006 and we have certainly not been let down so far. There are a number of reasons to be positive, with confidence slowly creeping back into the purchase market and remortgage likely to maintain its popularity.
With a cut in the base rate widely predicted, confidence is likely to be buoyed further. Lenders have already shown they are keen to get off to a good start with some aggressive pricing.
Gibbs: There was significant consolidation throughout 2005 following the bedding-in of the MCOB changes which brought many issues with them for the intermediary market, mostly due to the slow reaction of lenders to these changes.
I believe there will be greater emphasis on lenders to improve both service and products for intermediaries in 2006, as customers get increased levels of independence and continue to research and deal directly with lenders.
We have seen more retention measures put in place to keep and inspire loyalty of customers and, in turn, lenders should consider the loyalty of intermediaries in this regard. Recent Government initiatives to support first-time buyers will help, coupled with a continuing focus from lenders to develop innovative products for this area of the market.
Another factor will be the predicted house price growth in 2006. At 2-4 per cent per cent on average, this will again be good news for first-time buyers. Overall, it is expected that total lending in 2006 will be similar to 2005.
How significant is the recent restructure of RBS Group’s brands and to what extent will it threaten the dominance of HBoS in the UK mortgage market?
Cornell: I think the restructure is highly significant. For a long time, RBS Group’s bigger mortgage brands, that is, NatWest and RBS have not performed as well as you would have expected them to. I think they will need to do more than restructure the brands to be a threat to HBoS’s market dominance but it is a crucial first step. With Jayne-Anne Gadhia now responsible for all of the group’s mortgage brands, I expect a much more coordinated approach and I am sure that with the knowledge, experience, energy and enthusiasm of Louis Kaszczak and the rest of team, 2006 will be a big year for them. Hollingworth: This is a major restructure for a giant bank to undertake and cannot be seen as anything but positive. It indicates just how seriously the RBS Group is taking the intermediary market. Defining the brands into different areas of the market has been the feedback from the broker market and the restructure of the salesforce with telephone back-up should build on what has been a successful formula for the One Account and First Active brands. With Abbey already showing that it intends to continue its aggressive push, competition certainly appears to be improving dramatically.
Gibbs: I think for their sake it has been a necessity as the brands have been competing with each other. I still cannot see them having a significant impact on the market by restructuring alone. The offering in terms of service and product will have to improve to have a significant effect. The RBS rebrand which took place about a year ago saw four separate brands competing with each other in the intermediary market for the same types of business.
The new restructure within RBS, now known as RBS Intermediary Partners, has separated the product lines into distinct areas of expertise. This means that RBS see themselves as a one-stop shop and have a strong proposition for intermediaries with one level of contact and streamlined service and support.
This is a two-three-year programme to deliver the full end-service, that is, online for all areas. This will not topple the dominance of HBOS in 2006 but will certainly begin to give intermediaries improved service and much needed time saving when transacting mortgage business.
Savills and Charcol are both making moves to enter the non-conforming market this year and others may follow. Why are mortgage broker firms entering this arena and what impact will it have on the structure, recruitment and training of these established firms?
Cornell: Mortgage broker firms are entering this arena because it is more profitable than prime mortgage broking because the procuration fees are significantly higher.
It will be interesting to see how these two powerful brands market themselves in this arena. Somehow though, I doubt that we will be seeing the Savills’ logo in an ad in the back of the Sunday Sport. Mark Harris and his team have astutely diversified their business over the past few years, adding an overseas department and an affordable housing arm and this makes great sense.
The two critical success factors, as Hamptons see them, are:1: How the operations are branded and 2: Have their business models built in assumptions that sub-prime margins could reduce dramatically in the coming future?
Hollingworth: We have participated in the non-conforming market for some time. Unfortunately, with debt reaching record levels, it could well become a more important element of a broker’s expertise.
The increase in the number of lenders operating in this market has improved the level of competition in the market – a good result for the borrower and increasing the appeal for new broker entrants.
Brokers will always explore opportunities to broaden income streams and I am sure that new players will simply adapt their current processes for training of advisers in a new, specialist area.
Gibbs: This is an area of growth in the industry, given the recent history of self-certification mortgages and clients borrowing more than they can afford and now running into difficulties.
The market for this type of lending has also seen many mainstream lenders taking a softer view of adverse credit history,and even launching specific product ranges for clients in this situation.
With more lenders and products come competitive and innovative products. Brokers previously distancing themselves from this type of business due to the potentially adverse image associated with it are opening up to it due to the scale of this market and the frequency that clients fall into this category.
The structure of these companies may not necessarily have to change unless they want to keep this separate from the core business. The training and development departments of these firms would have to include a comprehensive and specific course in identifying whether clients fall into the non-conforming category or not, and how best to serve their needs.
What more can the industry do to address the concerns posed by the FSA and more recently by Which? on equity release?
Cornell: I think that the concerns of the FSA are far more important than the concerns of Which? I was surprised to see the damning comments of Which?
It would be a lot better to see lower equity-release rates but until more lenders enter this market, this is unlikely to happen. I think equity-release mortgages are not suitable for everyone and some elderly homeowners may be better off taking out other forms of mortgage. However, as long as lenders and brokers follow the advice and guidance from the FSA, they should not have problems.
Hollingworth: Equity release has long suffered a hangover from problems encountered in the past and unfortunately it would seem that old habits die hard in some areas of the market, as exposed by the mystery-shopping exercise.
Which? has pointed to the inflexibility of the products. Having said that, these products are likely to become ever more important as concerns over the level of pension provision continues. Regulation of reversion schemes cannot come soon enough to bring it in line with lifetime mortgages. Another key area is increased product flexibility and I expect to see more products offering gradual drawdown to generate income.
Gibbs: The FSA is mainly concerned about the advice given in many cases and has released guidelines. Advising firms should ensure that their advice process is robust and incorporates these guidelines – for example, ensuring that all alternatives to ER are explored and making recommendations to meet the client’s needs.
Which? criticised the products for being inflexible, costly and risky but this did not reflect how the market has already changed to address those very issues. The example used was certainly not representative of the market in general and focused on one worst-case scenario.
Many lenders have already launched innovative and flexible contracts and, with more lenders entering the market, the products have taken giant leaps in becoming less expensive. These contracts do carry risks like the rest of the mortgage market and these need to be taken into account by advisers. Additionally, the reversion market will be fully regulated, as confirmed in the Queen’s Speech, and safeguards such as the no-negative equity guarantee endorsed through Ship ensure that customer protection is of paramount importance.
What are your feelings in relation to Chancellor Gordon Brown’s decision to exclude residential property from Sipp portfolios?
Cornell: I may be in the minority but I think it was a wise decision to exclude residential property from Sipps. I think that by including it, the Chancellor would have been encouraging and benefiting a smallish number of people who tend to be quite high up the income scale.
The Chancellor needs to make pension provision more appealing for the vast majority of the UK labour force, not the highest-earning few. However, I think that changing his mind so close to the launch date was outrageous and unacceptable.
Hollingworth: The U-turn was, without doubt, a huge shock to everyone but it has to be said that giving tax breaks to potential buy-to-let investors did seem to be at odds with working toward an increase in affordable housing. I do not think that the change in the proposed Sipp rules will have any major impact on the market, as many consumers initially attracted would not even have been in a position to take advantage of a Sipp. The timing of the U-turn will have had the biggest impact, with lenders having expended time, money and effort on what was ultimately a dead-end.
Gibbs: The pre-Budget statement highlighted genuine concerns regarding the potential abuse of residential property being purchased and then used for personal benefit. However, the Government dealt with this issue like a sledgehammer being used to crack a nut by taking away the opportunity from those where such properties could be used for genuine commercial benefit.
The decision ,which took three years to arrive and then came too close to A-Day, has had a dramatic effect on those clients who had already geared up existing contributions or had paid deposits on property with intention to complete in their pension funds.
Providers themselves, who had the governance of properties to consider regarding the personal use issue, would see this as a double-edged sword, with obvious sales opportunities taken away but relief that the administration of such schemes would be kept simpler. Again, is is a matter of steps being taken too far and too late.
The Council of Mortgage Lenders predicts that up to nine new lenders will enter the market in 2006. Do you believe the market is already too overcrowded or do you welcome new lenders as healthy competition?
Cornell: I am not sure that a market can ever be too overcrowded. Economic forces will encourage new entrants to enter a new market if they think they can make a profit. I think that most, if not all, of the new entrants will be concentrating on the specialist market rather than the prime residential market.
Clearly, what we don’t want is lenders withdrawing from prime residential to lend in the specialist markets. However, most residential best-buy two-year year fixed rates tend to incur losses for lenders and there are still profits to be made in the specialist sector.
Hollingworth: I can not see a situation where a whole of market broker would feel that further entrants into a market was anything but good. We have consistently seen how increased competition drives down pricing and delivers better value to the consumer, particularly good news as many of the entrants are likely to be in the non-conforming market.
Not only are rates driven down but also new entrants are likely to bring something new to the party, hopefully taking service, innovation and technology even further forward. It also plays to the strengths of brokers whose value to the consumer in guiding them through the maze is heightened.
Gibbs: Fresh lenders, bringing fresh ideas and approach to various areas of the market cannot always be a bad thing. However, it is already a crowded market with a lot of choice and operating in a fairly benign market at present. Consider this along with low forecasts for property appreciation and it will be difficult for any new providers to make a significant impact on overall lending. All major players will not be complacent and allow new lenders to take market share, so competition can ultimately benefit the consumer.
What we do not know is which sectors the potential new entrants will enter and to what capacity they expect to operate. The jury is out.