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Mortgage edge – Jeff Knight

Applying higher lending charges are not the ideal way to help a borrower rehabilitate their credit rating. HLCs are no benefit to the intermediary or their client and is invariably treated by the lender as cash or profit.

The debate over the fairness of higher lending charges (once known as mortgage indemnity guarantee – or Migs) has existed for many years in the mortgage ind-ustry. However, while HLCs have all but disappeared below 90 per cent LTV in the mainstream sector, there are still a number of non-conforming lenders which charge HLCs from 75 per cent LTV for reasons many of them themselves seem at a loss to explain.

The justifications given range from a rather weak “we have always charged them” to “it covers the additional risk of the lending”, which is really equ-ally invalid in a modern mortgage market.

Unlike mainstream mortgages, intermediaries have often, with good reason, found it difficult to compare loans in the non-conforming sector due to the varying lending criteria and levels of adverse credit used within a riskbased pricing structure.

This picture is clouded even further by some len-ders continuing to charge HLCs – such as Platform and MPLC – and others choosing not to – such as GMAC-RFC and Birming-ham Midshires.

Taking one of the fundamental tenets of the FSA regulations, lenders have an obligation to make their products as easy to understand as possible, transparent and comparable.

Migs from 75 per cent LTV may not go against the letter of the law but they certainly go against the spirit as they are often a substantial charge which is not reflected in the actual rate, something a broker and customers often look at for comparative purposes.

To give an example, on a 100,000 loan, if a customer borrows 90 per cent at a rate offered by a lender of 7 per cent, if the lender then charges an HLC from 75 per cent at a rate of 6.95 per cent, the customer will have to pay an additional sum of 1,156.

If the said product has just two years of early repayment charges and the customer redeemed at the end of this period, the HLC is the equivalent of having added 0.58 per cent to the rate.

To come back to the earlier argument or def-ence that some lenders put forward about the HLC being a “risk”-associated charge, how can it be justified when you are already engaged in riskbased pricing?

Invariably, customers borrowing above 75 per cent in the non-conforming world are charged more than customers below 75 per cent for the risk so why a “secondary” risk charge?

The answer, I would suggest, lies in the fact that lenders still charging HLCs want the rates to look attractive as poss-ible and would rather bury some of the costs in the detail.

This means that there is not a level playing field for the purposes of comparison. The HLC will be shown on a KFI but it is still relying on brokers and customers to dig into the details and then work the charge back into a rate equivalent, something that most cannot or will not do. So is an HLC from 75 per cent LTV still clear, fair and not misleading?

Research by GMAC-RFC last year showed that the profile of the non-conforming borrowers is, on the whole, very similar to the mainstream borrower. If this is the case, why are some lenders still treating customers bet-ween the different mortgage sectors differently and applying such a fee from lower LTVs?

One key point that materialised from the non-conforming research was that non-conforming mortgages played a vital role in rehabilitating an individual’s cre-dit profile.

Borrowers in this sector tend not to keep their loans for very long and remortgage to mainstream rates as soon as they can, say, after two or three years. These borrowers are looking to get back on the road to financial recovery but applying HLCs is certainly not the ideal way to help a borrower rehabilitate their credit rating.

Higher lending char-ges are no benefit to the intermediary or their cli-ent. The borrower will pay the charge to the lender who will, in most instan-ces, no longer use it to buy an insurance policy to protect the lender nor, indeed, even put it aside for a raining day. Instead, HLC is invariably treated by the lender as cash or profit, helping to subsidise the rate that a borrower pays.

Most lenders in this sector seem to be arguing that the non-conforming market is simply a natural extension of the mainstream market so perhaps lenders could start employing this view in their product design and put the HLC firmly where it belongs – in the realms of history.

Jeff Knight is head of marketing services at GMAC-RFC

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