Guy Batchelor, sales and marketing director, PlatformColin Barrett, senior products manager, BM SolutionsJeff Knight, head of marketing services, GMAC
To what extent are the Government’s proposals to help firsttime buyers compatible with the agendas of banks and building societies? What can the industry do collectively to help?
Batchelor: Government proposals are based on sharing equity. According to Moneyfacts, only 19 lenders accept shared ownership and over a quarter of these limit the types of products allowed, with many offering only standard variable rates. It cannot be said that the concept has been welcomed with open arms by lenders.The proposals will mean the state retains a stake in the land while the buyer pays for the cost of bricks and mortar. The Government believes it is possible to build a high-quality home for around 60,000. I believe lenders will have serious doubts about the value of the security and many will be reluctant to offer mortgages under such a scheme. Lenders can help FTBs by adopting realistic affordability calculations and ditching traditional income multiple calculations. We are seeing this being adopted by more lenders.
Barrett: Plans from both the Government and financial sector have included ways to help FTBs. Homebuy schemes, shared ownership and a variety of 100 per cent-plus loan-to-value products have been introduced with the aim of helping FTBs secure homes in today’s market. None of these has addressed the fundamental problem preventing FTBs getting on the property ladder – the disparity between income and property prices. To combat this, we need a greater number of affordable FTB properties in the housing stock. FTBs can also give themselves a boost by starting to save as early as they can.
Knight: The Government has proposed initiatives such as property investment funds, which will help the private rented sector by boosting buy to let. It has also put forward initiatives for shared ownership, where an equity share for the lender, rather than a return via an interest rate, will create affordability for key employee groups. This is something the industry is looking at and could present a major opportunity.What we need to help the market is more properties built, which will make homes more affordable, and the stamp duty threshold raised. This has not moved in line with property inflation and is disproportionately painful to FTBs.
Is it time the FSA reinvestigated self-certification? What was not addressed in last year’s consultation?
Batchelor: Lenders know the FSA will look closely at practices involved in the agreement of self-cert loans during compliance visits and audits over the coming months. On the whole, lenders have tightened criteria and added requirements to ensure the spirit of the FSA’s responsible lending rules are followed.Intermediaries must ensure clients understand that it is a criminal act to lie on application forms. The FSA must closely monitor intermediaries as well as lenders, as intermediaries who sell self-cert must act responsibly and ensure they are acting in clients’ interests. Barrett: When the FSA looked at this sector last year, it was satisfied the necessary controls and procedures were in place. Since November, self-cert has been covered by FSA rules, as set out in MCOB. Most reputable lenders are not complacent but are satisfied with the controls in place in the market and will continue to service this part of the market.
Knight: The FSA comprehensively investigated self-cert at the start of last year, undertaking the industry’s biggest-ever systemic review into one product line. The conclusions were there was no market abuse, lenders had sophisticated underwriting procedures in place to prevent abuse, arrears levels were not materially different from mainstream and no specific changes to procedures were necessary, other than those specified in the MCOB rules which came into effect on October 31. The only people calling for a further review of self-cert are those for whom these results were a surprise. The resources of the FSA and of lenders are best focused on implementing the new regulatory regime and the self-cert rules that have flowed from it.
Are mortgage brokers shying away from selling general insurance products because of the extra regulatory burden so soon after M-Day?
Batchelor: This is the feedback I have been hearing from the market. However, if brokers stop selling GI, they may have to replace lost income by writing more mortgage business, which is something we would not be adverse to.
Barrett: It is true that many brokers have been focused on M-Day and, according to reports, many were not aware of GI regulation. Whatever decision brokers take, they need to operate as efficiently as possible to maintain a healthy regulatory position. One of the key ways of doing this is to submit business online. We expect an increase in online submission as brokers strive to cope with the demands of mortgage and GI regulation.
Knight: I have yet to see how many mortgage brokers have also become registered for GI sales but I can assume that, if they were fairly active in this market before, it is likely they will continue to be so in future. Those that did little business in this sector may now stop selling such products and choose not be regulated in this sector. This does not suggest they are simply shying away from it, it is simply a matter of making the right decision for their own business.
Could the popularity and ease of acquiring second-charge loans outstrip the option to remortgage?
Batchelor: I do not think so, as the remortgage culture seems here to stay. Nearly 50 per cent of mortgages sold in the UK over the past year have been remortgages. Also, second charges are not commonly available via high-street lenders, so this will limit their availability to borrowers.The key advantage of second charges is speed, as it is possible to obtain the advance within 48 hours of application. The CML does not publish data on second-charge lending but it is estimated that the market is worth 30bn-35bn in gross advances, so it is relatively small at present. However, in a report published last year, Datamonitor predicted a sharp increase in lending in the next few years, so this market has the potential for rapid growth.
Barrett: Second charge has proven to be quite popular but is unlikely to outstrip options such as remortgaging and further advances. In most cases, the latter two can provide cheaper, easier alternatives but it is up to the broker to decide which is the best option in the case of the individual.
Knight: I expect the level of remortgage business will increase during 2005 and will be most prevalent in buy to let. Remortgaging will remain popular, despite the benefits offered by second charges. One benefit, for some, is that second charges are unregulated, so some brokers who are no longer authorised to sell mortgages may concentrate their efforts on this area.There will be circumstances when a second charge may be preferable to a remortgage, say, if the borrower has to pay a redemption charge to the existing lender, which is why borrowers should always seek independent advice. Although second charges often have higher rates of interest, one perceived benefit over remortgaging has been speed of offer. I suggest this advantage is disappearing due to the growth of online systems. With growing use of technology and more competitive remortgage products, it will appear that remortgaging will become amore viable option.
Is there a possibility of an increase in complaints to the Financial Ombudsman Service on protection policies sold on the back of mortgages? How will this affect the mortgage community?
Batchelor: Last April, Liberal Democrat Shadow Chancellor Vincent Cable highlighted concerns over the sale of MPPI and called for a review. This followed claims that the General Insurance Standards Council was failing in its duty to protect policyholders by ignoring excessive commission charged by brokers. Many lenders, including ourselves, no longer offer intermediaries the facility to sell single-premium MPPI because misselling was potentially high. But I think most intermediaries never sold such policies anyway as take-up has never been high.Any action taken by the FOS will only affect a small minority of intermediaries, potentially from the loan broker community, where this type of cover has been sold alongside second-charge loans.
Barrett: There is always speculation about where the next big misselling scandal will come from. Brokers are being warned against recommending single-premium accident, sickness and unemployment cover as a solution to all needs. It is in the interests of customers and brokers to ensure our industry does not experience scandals such as those in the past.
Knight: I see no reason to expect any increase in complaints to the FOS regarding misselling of protection policies. In fact, I envisage a reduction now that areas such as MPPI are regulated by the FSA. The mortgage community has learned from experiences such as endowment misselling, which can indirectly affect mortgage sales. Therefore, where lenders have partnering firms to supply products such as MPPI, they are chosen carefully to ensure no reputational risk is at hand.Intermediaries have a range of very competitive products from which to choose, ensuring that best advice is always given. Products such as MPPI are not always appropriate for everyone but for others they are invaluable. The important thing is that they pay up when required. Is confidence in the mortgage market returning after a slump in lending at the end of 2004?Batchelor: With no sign of a base rate increase on the horizon, early signs are that interest in trackers is rising again. Added to gradually decreasing costs of funds for fixed rates, it is clear that there will be incredible choice available to borrowers in the early part of 2005. There is no doubt that it will be a tougher year for lenders, as the ability to hit level or increased lending targets will have to come from increasing market share.
Barrett: I do not believe confidence drifted during the end of 2004. Economic fundamentals were still in place but what we did see was the market calming down to more sustainable levels. We still have record low inflation and low interest rates and there is anecdotal evidence that FTBs are gradually re-entering the market.
Knight: We have not seen a slump in lending, it has been a slowdown, which is very different. It has been overdue and I expect it to continue this year, with around about a 10 per cent reduction in lending compared with 2004. I do not think confidence levels are affected. This would only happen if we saw a crash and this will not happen as market conditions are very different from those of the early 1990s, when interest rates and unemployment were higher than today.We need to remind ourselves that interest rates are still very low compared with the past. What we are experiencing is a gradual slowdown as a result of persistent monetary policies, nothing more. I expect that certain sectors, particularly buy to let, will not see any slowdown at all.