Do you think the Government has done the right thing nationalising Northern Rock?
Yes and no. I have my doubts as to the Government’s ability to run or manage an organisation like that. Typically, the private sector is much better at running an efficient organisation. You only have to look at how much money has gone into the health service without any discernible increase in service.
But I am surprised we have not got to this point before. I think the Chancellor and the Prime Minister were naive to think that any commercial organisation would buy Rock on the terms the Government wanted. You do not get to be Richard Branson by overpaying.
But I think it was the best outcome. Northern Rock at the moment cannot stand on its own two feet. It is supported by Government backing and therefore if the market improves and trading conditions improve for Northern Rock and it can start trading again efficiently, then it is only right that the taxpayers get the benefit of that rather than carry the risk and carry the finance cost and some other party making billions and billions of pounds out of something we are all paying for.
What do you think of the Government’s handling of the whole situation?
I think it has just been appalling. From the start, it has been mishandled. Clearly, it is very hard to apportion blame because there were so many different organisations that were stakeholders, the FSA, the Treasury, the Bank of England, etc, and somehow this slipped between them. Even now, we can’t pinpoint whose fault it was.
I feel rather sorry for the FSA because they obviously took a sufficient interest in Northern Rock. They checked the books but I am not sure that it was within the FSA’s brief to say: “If the credit markets stop (which they do every decade or couple of decades), what would you do?”
The Government was very slow to put in place the guarantees. If they had responded quicker, we would not have seen those poor pensioners spending days queuing outside Northern Rock and, if anything killed Northern Rock, it was the sight of people queuing to take out their money.
Where does this leave Northern Rock as a brand, both for brokers and, perhaps more crucially, for the end borrowers?
Brokers tend to recommend mortgages for a number of reasons. Some of it will be the rate, some of it will be the service, some of it will be the underwriting, some of it will be the product itself but, obviously, some of it is down to the organisation itself.
The thing that needs to be made crystal clear is that any mortgages that Northern Rock proc now are perfectly safe and if it had a good rate of interest now, I would be very happy in taking a Northern Rock mortgage out. I would not have any fears about how my mortgage was going to be handled or who was going to be processing it or whatever.
The fact is at the moment that Northern Rock’s range is quite poor in terms of value because clearly they do not want to be writing large amounts of business at the moment so it is priced to stop them selling many mortgages. But there may be some times when Northern Rock has the best product and I would expect brokers to carry on.
From a consumer point of view, the brand is as dead as a dodo. I think it would be very, very difficult for it to transact on a continual basis. If it is going to carry on with mortgages, Northern Rock desperately needs the market to open up. It should be able to borrow at reasonable prices because it is still solvent, its mortgages are still being paid but, with no signs of the wholesale markets opening up, to sell mortgages, Northern Rock needs savers. At the moment, they are having to offer very, very generous savings rates and I do not think the economics are there for it to be able to offer such generous rates if it is going to be transacting low volumes of mortgages.
Are there any signs of the capital markets getting past the worse effects of the credit crunch?
Not really. I think mortgages are still a toxic word so mortgage-backed securities are still not an appealing asset. There will come a time, though, as the quality of mortgage lending is very high now. Credit scoring and underwriting is very robust now. The lenders are now selling mortgages very profitably and there will come a time when someone will say, “Actually, we are prepared to buy a big chunk of loans”. The problem for the lenders is no one really wants to go out there and securitise. They don’t want to be the first in case it goes wrong but also it is like a sign of weakness. The book is better than ever, it is more profitable than ever, there is more margin in it than ever but no one wants to be first.
The problem will sort itself out because UK mortgage rates are so high compared with the real cost of funding that the mortgages the lenders are now selling are very profitable so at some stage an investor is going to come in.
It will correct itself but I am not sure it will be within the first half of this year. But it will come back and there will be an element of catching up. Rates will come down, there will be some sexy stuff for borrowers and the market will be a lot busier in the second half.
When the market does come back, will the funding come back quite quickly?
I think it will. The floodgates will open up. There is a pent up demand within the market. We are seeing an artificial lack of supply in mortgages so lenders are able to win, whatever market share they want without necessarily pricing aggressively. The lenders are rubbing their hands with glee effectively.
But it will come back and its just a matter of who is left at that point because I think there will be some other lenders who follow Advantage. The heavy end of the sub-prime market is effectively not there. When we talk about things getting back to normal within the prime sector that will mean decent rates, not perhaps as loss-leading as they would have been. In the sub-prime sector, I am not sure whether we will ever go to the sorts of lending we had before, where clients with very heavy sub-prime were able to borrow at terrifyingly low rates which probably was not pricing in the risk properly. Life will return to some degree of normality but not the heavy sub-prime market.
Do you think there is more bad news to come out of the investment banks from the US market?
I have a feeling that most of the US guys, when it came to the last round of results, would have disclosed every single piece of bad news. They wrote off some fairly huge chunks of money. If you are going to give some bad news, then you give it all.
They did not do it very cleverly to start with because they figured it might get back to normal so they were very cautious with some of the bad news they gave. But I would be surprised if the investment banks have any more bad news to reveal because last year was the most phenomenal opportunity to throw out to the market any potential losses they could as it was a like for like comparison with their peer group. The stuff they have just now should be whiter than white.
What is your take on the UK property market? Have you seen a slowdown in the number of borrowers?
I suppose yes and no. The estate agency business, our parent company, is definitely quieter than it was six months ago or this time last year. In terms of prices, there are so many factors and so many different indices that cover data from different periods. The housing market is in a confused state. There are lots of different data and different trends. Clearly, borrowers are nervous and despite two base rate cuts, mortgage rates do not feel as cheap as they would have in a normal market. There is a chronic undersupply of lending which means people are having to pay more for their mortgages than they would have six months ago.
There is nervousness about house prices. If you are a first-time buyer just about to rush out and buy your dream property, are you really going to do it in quarter one or quarter two? You are probably going to think, let’s wait and see what happens. Similarly, speculative movers are probably going to sit tight.
But clearly there are people who need to move through growing families, changing jobs, divorces, people moving to the UK.
The long-term demographics of our housing market are still such that demand exceeds supply. Until we build more property, the demand is not going to change.
Do you expect to see further base rate cuts this year?
It is a matter of wait and see. When I look at America, I am terribly envious of the reaction of the Fed but I think the Fed is terrified of the state the US housing market is in. And it is in pretty terrible conditions. When you look at the UK market, we have no issues at all compared with them.
On the whole, UK plc is doing pretty nicely. We had a drop in unemployment last month and the housing market is not great but the Bank of England’s primary mission is to keep inflation under control and there is so much pent-up inflation in things like utility bills, etc, that most of the data sugg-ests that the kind of wage rises being granted now are con-siderably in advance of inflation. The Bank of England is terrified by the threat that inflation poses and I think they think the threat of inflation is greater than the risk to the hous-ing market.
Is Mervyn King going to have to write another letter to the Chancellor?
I think he is going to have to soon. It needs to go to 3 per cent and we are considerably below that but with utility bills and petrol and also food inflation as well, it is quite conceivable that he will have to write again.
But it is very difficult for the MPC because when they cut the base rate, it takes a long time for it to feed through. There is a fantastic expression and I cannot remember who I ripped it off from but monetary policy is like pulling a brick on a piece of elastic. You give a small tug, it doesn’t move, you give a small tug, it doesn’t move, so you yank it and it hits you on the nose. That is definitely the case because a quarter a per cent here, nothing happens, another quarter per cent and eventually they have to think, oh my god, what is happening? The trouble is that the effects of the previous cuts take an awfully long time to filter through.
The trouble the Bank of England has is that the UK housing market has supported the UK economy phenomenally well over the last decade. In 2001, 2002 and 2003, I think we avoi-ded a recession that our European colleagues had purely because people were remortgaging the equity out of their properties and merrily blowing it on their credit cards every weekend. If the UK housing market does slow down and we have totally flat house prices, it is going to mean people will be a lot more frugal with their spending. They are not going to change their cars every three years. They are not going to buy themselves huge 50-inch plasma TVs. They are not going to buy themselves all these things they don’t really need and that is a big risk.
With a slowdown, will brokers see a lot more of their business come from the remortgaging of people coming off existing deals rather than new house purchase?
I think a lot of brokers have been able to live off the purchase market. They have not necessarily had to care about their existing client when they come to remortgage because there are always two or three on the front step saying, “I need to buy this house.” The good thing for brokers is there are lots of statistics showing how many people are coming off fixed rates. You also need to throw into the equation Northern Rock borrowers because Northern Rock will be very keen to unload its existing borrowers from its book.
If you speak to any broker, they will confirm that trying to remortgage a client away from Northern Rock was nigh on impossible because they would just offer the client brand new rates we did not have access to. So we can look at all the Northern Rock clients that we have ever had and we can be quite certain in our minds that the rates they will be offered will not be very attractive because it will not want to keep them.
We have also had fairly meteoric growth in buy to let in the last two to three years and a lot of those landlords will be looking to remortgage. Buy to let will have a strong year in 2008 because all the people who are putting off buying a property will need somewhere to live. The yields are doing quite nicely at the moment. Potentially, the base rate cuts allow borrowers to borrow more money that they would have because the rental calculations are easier and also if there are people who do need to sell, the people who are most likely to buy those properties are landlords. They are effectively cash buyers, they are not in a chain, they are able to snap up things fairly quickly and your typical portfolio landlord is in it for the long term.
You mentioned earlier that the heavy sub-prime sector was not going to go back to the way it was operating last year. Is the sub-prime sector effectively closed at the moment?
I have to say I am not a sub-prime expert. Less than 1 per cent of our business is sub-prime and that is near prime rather than heavy sector. The problems in the US has meant that no one wants to take vast amounts of heavy sub-prime on, to buy it as an asset.
I think the scary bit for the sub-prime market is histor-ically borrowers would not stay on sub-prime lenders’ books. They would be remortgaged away at the end. And for heavy sub-prime borrowers who have come to the end of their fixed rate or their tracker, there is nowhere for them to remortgage to and it is important for lenders to decide what they are going to do with these borrowers. In the past, they would have moved to standard variable or Libor plus two or three.
The trouble is now, if people have a huge payment shock because they are going onto standard variable rate, if that pushes them so they cannot repay their mortgage, it is not good news for anybody – so we might start to see the birth of the retention market in heavy sub-prime.
There are a lot of complications because the sub-prime lenders sold on their books so the lender needs to agree it with whoever it is who has bought the book. But I guess if you bought a sub-prime book, then, yes, you will make a lot of money if they all start paying SVR but you will make some fairly huge losses if all of them stop paying their mortgages.
It has been over a year since the introduction of renewal fees. Have they made much difference?
The thing with retention is it does not matter how slick or easy or convenient the process is or if a lender pays us or not, if the rates are poor, we cannot sell it. If I am saying, “Right, I am going to leave you with lender A and they are going to pay me this money”, borrowers are a lot more inquisitive about why you are being paid a proc fee for what they see as no work. Brokers have to remember that if we are arranging a product transfer or retention rate, we have the same degree of liability in terms of advice. If you are selling a retention rate, we have to work harder to justify to customers why that is the best rate.
Is Hamptons better placed to deal with a downturn in the market because of its size and because of the Hamptons brand?
We are pleased to be part of such a large organisation and we are lucky we seem to have a good name in the industry. Any mortgage brokers who have a good book of borrowers should be well placed to survive the next few months, irrespective of whether you are well known brand or not. If you look after your existing clients, it will make it a lot easier to make a living in the next few months.
Some of the lenders are talking about a flight to quality, where they will only deal with certain brokers and not with others, but we have not really seen any evidence of that. We might find if there are continued problems with funding, you might find some lenders who will only wish to deal with certain intermediaries. Which I guess if you are lucky enough to be included that is good but who knows. I hope it does not come to that.
As well as the UK mortgage business, Hamptons also has the international mortgage operation and some commercial lending and some bridging finance. How important is it to have other areas?
We don’t really do too much commercial, I have to say. It is something we have never really seen a vast need for. Commercial lending is quite specialised so you cannot really dabble at it. We don’t have a commercial broker. If someone comes along, then we will try and help them and if we can’t, we will refer them to a specialist broker or packager for advice. On the international side, there are some fantastic opportunities. One of my colleagues, Brendan Cokely, is setting up Hamptons mortgages in Dubai. He joined us from Charcol towards the end of last year. Once he is done in Dubai, he will move on to India and Italy and Morocco. Hamptons is owned by a Dubai-based property company called Emaar Properties, who are one of the biggest property companies, if not the biggest, by market capitalisation in the world. So being part of an organisation that big is very exciting but our core business model here is looking after UK borrowers with UK properties.
Have you identified any areas you would like to change or develop at Hamptons since you became managing director?
From about May onwards last year, we embarked on a pro-cess to try to make the most of the estate agency businessthat owns us because historically we have received very little business from that. Hamptons sells a lot of property and we were not arranging the mortgages. Ninety per cent of people who buy a property through Hamptons take out a mortgage but they were not taking them through us. So for most of last year, we were slowly building an employed salesforce to look after the offices and I suppose it is still an ongoing process really. The fact that the property market is slowing down has made it a bit more difficult but we do need to grow that side of the business and the number of referrals that we are getting from the estate agency has pretty much trebled since last summer.
It must be a nice part of the market to be working in as well?
Anyone who works in estate agency financial services knows that it is always an interesting relationship between estate agency and financial services. But if you can get it right, it is tremendously lucrative. With the average person purch-asing through Hamptons, the mortgages tends to be £300,000-£400,000.
Another area where we are trying to pick up some business is life cover and protection and also things like general insurance. We have a general insurance department and anyone buying a house will need buildings insurance. The lender is going to insist on it. So those are the opportunities within the estate agency business that we are slowly getting to grips with. But that I suppose is the core change to the business. It is a great business. We are just trying to align it with what is available with the estate agency.
The other big business relationship for Hamptons must be Concordia. How is that going?
It was never really meant to change to world. It was never really meant to change the way we do business. It was partly a defensive move and partly an offensive move on our part. The work that we do benefits all of our firms, we are not trying to pick up other people’s business, we are just trying to make the most of what we have got.
I have to say from our point of view that it has been ext-remely successful. The terms that we enjoy from a number of lenders have improved considerably and also through it we have developed closer relationships with a lot of lenders. The lenders understand more about us. It has helped them get closer to all of our businesses and we find that it is a virtuous circle. How important is the continued influx of first-time buyers into the housing market?
I think it is crucial. You cannot have a sustainable housing market without people coming in on the first rung of the ladder. If there is a good thing to come out of house prices slowing down, it will be that it will help a few more first-time buyers to get on the ladder. Helping first-time buyers get on the ladder is an industrywide problem and is something that needs more work. I would love to see another product like Advantage’s flexi-share, where lenders take an equity stake in a property to help the first-time buyer get on the ladder.
The lenders are obviously quite cautious about those products but I think if lenders and brokers can sit down and design some products, they will work a lot more effectively than plan B, which is when the Government says, “This is what we do with first-time buyers.” The Government doesn’t really have a great track record when you look at product development. If you look at things like Cat-standard, if you look at stakeholder pensions, the Government does not really understand what products an industry needs or wants.
The FSA is looking at sales of payment protection insurance. How reliant is the industry on the sale of these products?
There are some firms, particularly in the sub-prime market, who have made big sums of money selling MPPI. Some of those policies have helped borrowers immeasurably and the FSA is quite understandably worried about policies which may have been sold which are not really any good to people and I think that is something any broker or lender or insurer will want to see the end of. We are professionals giving professional, regulated advice and we need to know that the advice we are giving is the best advice for our borrowers. I have to say that the range of MPPI products are particularly good when you look across the board. But the trouble is MPPI is now such as scary area attracting so much attention that most brokers are steering clear of it, which is a kind of a double-edged sword because it means that potentially there are some borrowers out there who are not taking out insurance who should.
The last thing is on regulation of mortgage broking. Does the mortgage broking business have anything to fear from an expansion of the retail distribution review?
In any market, nothing stays the same for ever. You cannot rely on the world to stand still. I think the RDR is looming and while the FSA has said it is not looking at mortgages at the moment, potentially it could apply to mortgages. Brokers should listen to Ami and talk to Ami about what is going on and rely on Ami to lobby for us. I fully support borrowers knowing how their intermediaries are remunerated.
Disclosure is a key part of our industry but one of the fears I have of the RDR is if it means brokers cannot receive commission from a lender, in effect, borrowers are going to have to pay for advice and most people don’t like paying for things. Mortgages are a very important area in anyone’s financial situation and if you are discouraging them from seeking professional, independent advice, then that is a dangerous thing. If the only place you can go for free advice is your bank or building society, then they are not receiving whole of market, professional advice.