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Mortgage View: The light touch is over

An important announcement slipped out into the public domain last week which will have a significant impact on our market.

The FSA has said that after a year of light-touch regulation it intends looking at the mortgage market more rigorously. It has also announced that one of the initial areas it will be looking at is the marketing of adverse products on the internet. This area has been where some of the gravest breaches of the rules have occurred over the past year according to most observers so the attention from the regulator is more than welcome.

To the innocent user of the web, there is little initially to distinguish genuine consumer offerings from lenders or intermediaries from the multitude of lead-generation sites.

The real problem exists among the lead-generators. Many of these sites are compliant, with the advertising approved by a regulated business but there are a mass of fringe players who either blatantly or unknowingly breach all manner of the rules. The real issue with these sites lie in the uncertainty for the consumer when his details are allocated to an intermediary. Many validate the allocation with the consumer but this process does not normally disclose the underlying intermed-iary’s fee proposition so it is random whether the consumer ends up being passed to a usurious high fee-player or one of the lower-fee participants. Given that most adverse borrowers’ concern is getting a loan, they are less focused at this stage on how much it will cost them and whether they could get the same result at far lower cost. This breaches the primary marketing rules- any of us who attract customers direct have to disclose our fee positioning in all our marketing, and the principles of TCF. The non-compliant lead-generators have had a field day with bid prices for leads and the underlying pay per click escalating significantly this year.

One has to presume the FSA will now look closely at this business cycle, leading to a slimming down of lead generators. Supply and demand then suggest that the cost of web-based origination will go up in sub-prime sector. A number of high-fee brokers have already put their fees up this year as a result of higher origination costs compounded by weaker conversion rates. For this sector to survive, they will have to explore alternative distribution means.

The adverse sector is also getting US attention. A number of US players have headhunters searching for start-up teams here. The successful US players rely on high levels of automation and lower origination costs. Perhaps as we see a change in distribution patterns in sub-prime, it will be accompanied by a switch in lending focus with only the most technically advanced surviving.

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