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House calls

Our panel discusses the implications of ringfencing on mortgage costs, the regulation of sale and rent-back schemes, what impact the mortgage verification scheme will have on fraud and why lending remains subdued despite an upwards trend

The Panel

Jonathan Cornell, Head of communications, First Action Finance

Alan Lakey, partner, Highclere Financial Solutions

Following the ICB report, which recommended ringfencing retail banking operations from investment banking, the Council of Mortgage Lenders has said it does not expect this to impact on mortgage costs. Do you agree?

Cornell: Ultimately, the CML is well placed to be able to give an answer as it represents the people involved and I would expect it is getting its steer from the banks. In days gone by there might have been a slightly lower cost of funding but I suspect it might have been for investment banks using access to retail savings rather than the other way round.
I am not at the coalface of financial engineering but I suspect the CML is right and that we will not see an increase in the cost of mortgages.

Lakey: I do not think it will increase the cost of borrowing. I was at a Lansons Regulatory meeting last week, where this was discussed in some detail. The consensus was the same, even from Santander’s chief economist. What was said only strengthened my initial thoughts that it should not make any difference to the cost of borrowing.

This month, the FSA extended regulation to all sale and rent-back schemes, except those involving a sale to an immediate family member. Is this a welcome move?

Cornell: I think so. It is an area where there is considerable scope for consumer detriment. You have got people who are in a big hurry to sell.
I am sure most of the firms operating in this sector are highly reputable, ethical firms that treat their customers fairly and it is to be hoped that statutory regulation will ensure the ones that will not play ball will not be able to carry on doing business.

Lakey: I am not a great fan of regulation but if you are going to have regulation, it has got to be cohesive and sensible. To have a situation where some bits of a house purchase are covered by regulation and some are not is foolish and confuses the consumer. I am happy to have all of it regulated or none of it but not a bits and pieces approach.

The most recent CML figures show gross mortgage lending in August at a two-year high but lending levels remain subdued overall. Do you expect mortgage lending to remain at low levels and why?

Cornell: Anyone hoping for a huge surge in mortgage lending is deluded. The starting position is for gross mortgage lending to stop falling and, touch wood, gross lending this year will not be lower than last year. This would be the first year since 2008 that it was not down on the previous year. If that is the case, it is a step forward.

There are new entrants circling around. Tesco is taking longer than it thought and Portillion is waiting to come into the market. Non-bank lenders such as Portillion will not necessarily bring in billions but it all counts. It needs to stop getting worse and if that is the case, that is progress.

Big banks and building societies are trying to repay the Government’s special liquidity scheme early and once that is done they can start to look to increase their lending.

Lakey: I expect lending to remain low. It is not just a question of the availability of funds, it is a question of confidence for the consumer. I would imagine they are less confident this week than they were last week.

People are worried about jobs and about their ability to make payments if interests rates rise. They are also worried about being able to get a mortgage and some are thinking they will not even go ahead and apply but will continue to build up a deposit and try and save 15 per cent rather than 10 per cent.

I have noticed my mortgage business is fractionally up this year on last year but not anything that would give pause for thought. It might be 10 per cent up but that is not much bearing in mind how far down it was on 2006.

The average rent paid in London passed £1,000 a month last month and with average rents rising quickly across the country – one recent survey says rents increased by 1.2 per cent in August alone – the buy-to-let market is attracting a lot of attention. Is buy-to-let the one growth mortgage market?

Cornell: It is a long way from getting back to the levels it was at in 2007 but lenders can earn a healthy margin on buy-to-let so they are interested in this type of mortgage. We have seen a steady increase in supply of buy-to-let mortgages and there seems to be more and more lenders entering the market.

Accord are running a pilot at the moment with the intention of entering. Buy-to-let has a very healthy future. It is getting harder and harder for first-time buyers to get mortgages as lenders are getting more picky about who they lend to.

They would much rather lend to established borrowers who have large amounts of equity or big deposits. We are not building enough property and there are significant levels of net migration, so buy-to-let is a good market.

Most lenders do not offer buy-to-let mortgages to customers directly and so an increase in buy-to-let lending is great news for brokers.

Lakey: I saw something written recently that said buy-to-let will form 25 per cent of mortgage brokers’ businesses. I was staggered by that.

It is not to say it will not form a bigger part but in my business it is not even 1 per cent. Part of the problem is that the only people who can go into buy-to-let are those who have sorted out their own mortgage. I had a first-time buyer looking to do a buy-to-let recently with a 60 per cent deposit and I could not find a lender to give him what he wanted until I managed to sweet talk one.

It is not easy to get buy-to-let. The deposit needed is high and another of the limitations is that most lenders expect you to have £25,000 to £30,000 income.
I think buy-to-let will grow a bit, as house prices are still depressed and people are looking for something that offers a value investment, which perhaps property does at the moment.

But I do not think the sector will grow in the way that has been suggested.

This month sees the launch of the mortgage verification scheme, which allows lenders to check income with HM Revenue & Customs if they suspect fraud. Do you expect this to cut the overall levels of mortgage fraud?

Cornell: I hope so. There are a number of brokers who seem to be very negative about it and I read something in the national press suggesting it was going to cut the amount of lending available.

It is quite sensible for lenders to use this but reading what the lenders are going to do, they will take every step possible to confirm income in the conventional way, asking them to supply pay slips, accounts and bank statements. Once they have done that and if they are still unhappy about the level of income an applicant is claiming, they will contact HMRC.

I cannot see there will be too many innocent casualties in this. Lenders will be using it as a last resort and, if it helps prevent mortgage fraud, it can only be a good thing.

Lakey: It is bound to reduce the amount of fraud but, more than that, it is bound to reduce the amount of business being done.

One of problems is lenders are going to get back from HMRC a confirmation of net profit. One of the areas that has always irked me is that when you submit your accounts to an accountant to reduce tax he can do a number of things, including writing down the value of fixed assets on a depreciation calculation.

Particularly for self-cert, I have always successfully been able to add that back in because that is a valid thing to do. Now that will not be feasible because lenders will not ask that question.

At the moment I am able in some instances to say the applicant’s net income is £21,000 but with depreciation he is really on £24,200. Some lenders accept that and some do not but under this scheme all of them will not.

I do not think mortgage fraud is as big a problem as has been made out and if there was a problem, it was four or five years ago.


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