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Market stands to retention

Guy Anker and James Salmon find that after a record year, the mortgage business could see a downturn as lenders strive to hold on to borrowers

Savills Private Finance managing director Mark Harris predicts the mortgage market will contract this year.

He believes that following a buoyant 2006 where gross mortgage lending is expected to hit £345bn, that figure could drop by almost £50bn, due in large part to the impact that retention schemes are having on the market.

The Council of Mortgage Lenders reported in November that remortgaging was at a five-year low, partly due to retention schemes, such as those introduced by Halifax and BM Solutions in July.

Harris says: “Retention will start biting but there is so much growth and so much more to do. Interest rates look benign but we might see a quarter per cent rise early on.”

Alliance & Leicester head of intermediary mortgage Mehrdad Yousefi also expects retention schemes to wipe billions of pounds off the remortgage marketHe says: “I am on record as saying the HBOS scheme will take £15bn off the remortgage market next year. If a lot of the top 10 lenders follow suit, then it will have an immediate impact but if there are only one or two then the impact will be not as severe.”

But Purely Mortgages chief executive Mark Chilton says, with the exception of HBOS. retention schemes will not be as big a threat to the intermediary market as feared.

He does not believe the mortgage market will contract, predicting instead that 2007 will be a steady year. He questions whether the merger of Nationwide and Portman could be a prelude to further consolidation, and whether any other lenders will follow HBOS’s example of paying full proc fees on retention business.

He believes that mortgage business will be static, with purchases down and remortgage business up.

But Yousefi warns that the mortgage market should also be on its guard due to the slowdown in the US housing arena.

He says: “Next year, the big talking point will be the slowdown in the US housing market which will have a big impact on the UK economy and you can bet that will have a subsequent impact on the housing market here.”

“At the moment, one has to be cautious about next year because interest rates are higher then last year so the mortgage market cannot be as big as in 2006.”

Yousefi says that with the plethora of new entrants to the mortgage market, particularly on the specialist side, it will be interesting to see who will be the winners and losers.

He says: “It is only really RBS, Woolwich and HSBC that are not in the non-conforming market but the margins are not crucial to them. They probably think they are doing well at the moment and the debate is rather among the next layer – between 10 and 20 – on the lending league table.

“Maybe consolidation will play a part, with prime players buying specialist lenders for quick entry into the market.”

The future of networks will also be in the spotlight after 2006 saw a number of networks either folding or being snapped up by rivals.

Yousefi believes Personal Touch Financial Services and Home of Choice will be the two networks to watch out for this year.

A key issue will be interest-only mortgages and the ability of some lenders to develop full online capability, notes Harris. But he does not expect many more lenders to enter the market after the glut of entrants in 2006.

Harris says: “The industry is still waiting to see what RBS is up to now it has reinvented itself with RBS Intermediary Partners but there is still no tangible evidence of what it is trying to do. A strong RBS has to be good for the market. It has still has not got it right.

“I do not expect there to be more start-ups next year but interest from the US banks should remain. Maybe there will be more branded lending from intermediaries. We are at a very advanced stage at that concept with Concordia and bigger intermediaries have that capability. It is also essential that we lobby lenders to help first-time buyers.”

Yousefi sees technology instant offers as continuing to be a major theme. He says: “I see more and more lenders wanting to use automated valuation models for valuations and do more of what GMAC, BM Solutions and Edeus have done. That issue will run into 2008 as well.”

The lack of advisers is stifling growth in the equity-release sector and initiatives such as Key Retirement Solutions’ Lifetime Advisory Service have been launched to bolster broker interest.

The mortgage market faces a nervous first few months of the year, with the FSA expected to announce the results of its quality of advice probe shortly. It has already trailed some of the outcomes and it does not make positive reading for the market.

Chilton says: “The results will be very interesting. I think, as usual, the FSA will find 80 per cent of advice is good and 20 per cent is bad. The bad advice will mainly be in the sub-prime market and among some small directly authorised firms.”

The year is also set to see the results of the FSA’s effectiveness reviews of the sub-prime and lifetime mortgage markets and good news on those fronts is unlikely.

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