What effect will the current rising interest-rate environment have on the mortgage market?
Cornell: There are good and bad effects of rising interest rates. On the bad side, homeowners are not likely to be so keen on buying bigger properties as they are concerned the payments will be too high. It may also put off first-time buyers if they will struggle to make the higher payments.
On the good side, I think that the higher rates are, the bigger the differential between a great rate and an average rate, so brokers should have a higher chance of beating what the client is offered directly by their bank or building society.
Yousefi: The current upward movement in interest rates may contribute to a slow-down in the housing market, with a consequent impact on the mortgage sector.
The latest house price indices for January 2007 have all highlighted, to varying degrees, that the market is cooling and it is possible that mortgage lending figures from the CML in the coming months will start to reflect a slow-down in growth in mortgage approvals and advances, compared with last year.
Affordability pressures will continue to influence the number of first-time buyers entering the market throughout the year but buy-to-let investors will continue to see a healthy demand for rented accommodation.
Berry: Interest rate rises are a key concern for intermediaries this year and, with January’s shock rise, it looks more than likely that we will have further rises as the year progresses. This will affect the market’s overall performance.
We could see a shift in the attitudes of consumers who may look at the longer-term impact of their mortgage choice on their financial situation as opposed to the maximum amount they can borrow. This could affect the advice they seek from brokers and lenders and may alter the type of product and service they demand.
What can the market do to help stem the increasing number of repossessions and arrears?
Cornell: It would be good to see brokers working more closely with lenders. A while ago, Accord made an excellent suggestion under which it would inform brokers directly if clients went into arrears, as long as the client had given prior consent. Brokers are likely to be able to help clients more quickly than relying on letters from the lender, as the broker already has a relationship with the client. A broker would be able to discuss the pros and cons of a remortgage or other forms of finance to clear the arrears or even to get them paid off in the first month they happen.
Yousefi: The repossession and arrears figures are still historically low and most homeowners can comfortably afford their mortgage payments. The growing sophistication of lenders’ affordability calculators also guards against customers overstretching themselves. Lenders deal with any borrowers facing financial hardship sympathetically, with every effort being made to avoid repossession orders which are in no one’s best interest.
Mortgage brokers can also help their clients by conducting a detailed overview of income, with a view to advising them on how best to cap or reduce their current mortgage.
Berry: It is true that consumer debt is increasing and this has an impact on the overall affordability stretch but you have to remember we are still experiencing a market with historically low interest rates as well as relatively low levels of unemployment. What is important is affordability.
As lenders we need to ensure that affordability is our key focus and that the tools are in place to help borrowers assess whether repayments are within their means and thereby help them to make informed decisions about their money.
This means there needs to be a greater focus on afford-ability and more lenders need to use affordability calculations when reviewing the amount available to borrowers. If a customer’s circumstances change, it is important that lenders take the necessary steps to help them get back on track.
Do you expect more lenders to enter the market this year after Virgin Money indicated that it may make a move? Will new lenders use the intermediary channel?
Cornell: I expect more and more lenders to enter the UK mortgage market. Despite rising rates, the number of arrears and repossessions are still at low levels. Across the prime mortgage sector, I think it is difficult to earn good margins but, even though they are falling, lenders can still earn decent margins in the specialist sector. I would hope the new lenders would use the intermediary channel, as we control the bulk of the UK mortgage distribution. Direct distribution would be a lot more costly and is more rate-driven.
Yousefi: It is understood that 17 organisations made applications to the FSA in the fourth quarter of 2006 to become mortgage lenders. Market rumour suggests that most are packager businesses which are innovating by becoming lenders but it would not be surprising to see some foreign banks entering the UK specialist mortgage market.
It is unlikely that we will see new lenders launching into the mainstream market using intermediaries as their only source of new business due to margin pressure.
However, you cannot rule out that one or two new lenders might come up with an innovative approach to penetrate a segment of the market, such as buy to let or minor adverse through the intermediary market alone aided by superior technology, self-service model or unusual product design.
Berry: It is likely that we will see more lenders coming to the forefront of the specialist market and we expect a competitive market to emerge as the year progresses. However, overnight success stories are a rare commodity in mortgage lending as intermediaries like to know who they are dealing with. Building trust and developing solid partnerships require time and good value propositions.
We are looking forward this year following a strong 2006 in which we saw a 37 per cent increase in like-for-like business and almost 50 per cent growth in the final quarter of the year. As an established lender, we will continue to have a strong offering within the industry and will continue to develop competitive products to existing and potential borrowers.
Did the FSA’s crackdown on exit fees go far enough?
Cornell: I think it was long overdue. No one objects to lenders increasing fees as costs rise but, with exit fees, the level of increase has been huge and the cost of closing a client’s mortgage has probably gone down, driven by IT innovation.
The trouble is that lenders will need to recoup the lost revenue from somewhere else so I suspect we will see arrangement fees increasing.
Lenders are in this business to make money, the banks have shareholders who exp-ect dividends, so the lost income is not going to be written off, it will come from somewhere.
Yousefi: Some lenders took steps to limit exit fees before the FSA’s ruling, with Northern Rock and Alliance & Leicester guaranteeing that customers would only have to pay the fees stated in their original mortgage agreements. We should all welcome transparency in fees and charges as it ensures consumers understand what they need to pay at various stages of a mortgage. The FSA has provided a transparent framework to set out what it expects from the lending industry.
Berry: This is another hot topic in financial services at present and one which many commentators will watch unfold with interest. What is important in financial services is that lenders ensure potential customers are provided with sufficient and reliable information when they are being explained any financial product.
The FSA has, for some time, stressed the importance of ensuring consumers are able to make informed decisions about their money – something I think most of the industry would agree with.
Are sub-prime lenders lending responsibly after the likes of Kensington and Rooftop claimed some of their competitors are being too lax in their criteria which creates losses and means borrowers struggle to repay?
Cornell: Lenders as a whole, and especially sub-prime lenders, have a very hard job balancing risk and return. If they lend too loosely borrowers may struggle to pay their mortgages, if they are too restrictive they will not lend enough to hit their targets.
Clearly, no lender lends if they do not think the borrower will repay it. Borrowers have a high appetite for debt and do not seem to realise they have to pay it back at some date and if they fail to make their repayments they will tarnish their credit file.
Yousefi: There is anecdotal evidence that some lenders have tweaked lending criteria in some segments of the market over the past 12 to 18 months in a stable interest-rate environment. As we are now facing a rising interest rate outlook and we have seen some difficulty in the US sub-prime market, it would not be surprising if senior risk personnel in some UK and US banks carefully examined their current criteria.
Berry: I believe, on balance they are. It is certainly a top priority for GEMHL that people are not taking on more debt than they can cope with or afford. Through the use of affordability models, we are confident that the industry is focusing its efforts on ensuring that borrowers remain within their means and that lenders are not over lending.
At a time when there is so much focus on affordability and increasing interest rates, it is imperative that lenders are doing all they can to prevent the situation from growing further.
Do you expect 2007 to be a year of network consolidation?
Cornell: It will be a year of consolidation for the whole industry. For small brokers, life gets more and more difficult. A recent FSA report showed that small brokers were struggling with regulation and I think it will be the same for small networks.
Last year, we saw rapid growth from networks such as Home of Choice which was also interested in acquisition. We will see lender consolidation as well. Last year, one of the big surprises was the Portman/ Nationwide merger and I think there will be a few events like that this year.
Yousefi: There is a consensus in the market that many small networks will not survive as they do not have the requisite number of mortgage advisers to generate sufficient business volumes to finance the annual compliance costs and provide a reasonable return for their owners. For instance, we have already seen some consolidation, with networks such as Personal Touch growing aggressively.
Berry: We do not see this as a year of significant network consolidation but rather a year that will see them continuing to drive organic growth while trying to give greater value back to their members.
It is not just about size for members. Networks need to add value for their members in terms of price and service and increasingly we are seeing IT solutions emerging as a key differentiator when it comes to networks trying to retain members and attract new ones.