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Now networks feel the pinch

Mortgage networks are the latest section of the industry to suffer due to market conditions.

Network Data, currently the biggest mortgage network in the market, issued a profit warning last week ahead of its half-year results, to be published in September.

In April, the firm revealed that as a result of the delay in the launch of home information packs it had made a loss of £1.1m in 2007, compared with a £300,000 profit in 2006.

Network Data’s latest trading statement reveals it has halved staff numbers since last September in a bid to reduce costs. But despite these cuts, the group says the results for the full year to December 31 are likely to be below market expectations.

The company’s three subsidiaries – Network Data, Network Surveyors and Hipstar – all rely on the volume of transactions in the mortgage and property markets and have therefore found the first six months of 2008 challenging.

Last week also saw Prestbury Holdings disclose a loss of £1m compared with profits of £250,000 in 2006. In its final results for the 14-month period ending December 31, the firm warned revenues for this year will be significantly reduced, with adverse conditions continuing into the first half of 2009.

Prestbury says it has reduced employee numbers by an average of 23 per cent as it looks to cut costs.

John Charcol senior technical manager Ray Boulger says mortgage networks will not be the only ones in the distribution market to suffer over the next 12 months. He points out that packagers and brokers will also find the current market conditions difficult.

He says: “Remortgaging activity was holding up well for the first half of the year but it is going to be much more challenging for the rest of the year.

“The question is how much people are suffering. In Network Data’s case, one of the biggest mistakes they made was to believe the Government hype over home information packs with the launch of their subsidiary Hipstar. That is going to continue to lose them money.

“Add that to the current problems in the mortgage market then you suffer even more pain.”

In its last interim report, Prestbury revealed 65 per cent of its mortgage revenues came from remortgage activities. Chief executive officer Lee Birkett says: “This is still the case, but the ability to move clients to a better mortgage with a new lender has become ever more challenging.”

Boulger believes it is inevitable that mortgage networks as well as brokers, packagers and lenders will have to consider selling to a rival. Both Network Data and Prestbury have announced plans to buy other networks, with acquisition targets already in sight.

Network Data chairman Grenville Folwell says the firm is evaluating acquisition opportunities that can be merged with its existing operation at little cost.

Savills Private Finance director Simon Jones says: “Networks need to show they offer value to members. If they do, then I expect them to survive, albeit with some consolidation. Clubs are a different issue, especially if they offer little more than aggregation.”

Prestbury has ensured its members it can still offer them extra value.

Birkett says: “It has been tough to recruit new Moneybrain AR franchises in light of the economic climate and it was unforeseen by the directors that this would be such a bad time for these new AR businesses to be launched.

“We are committed to working with the business- owners and to get them up to their planned new business levels by finding new ways of generating business and new clients for them.’

Jones says: “Good practitioners of both networks and clubs will be working hard on improving their offerings. Because they have fairly short contracts with brokers, if they are not seen to offer value it is relatively easy for brokers to extricate themselves. There is a limit as to how you can diversify and how quickly this will produce the income required.”

Birkett feels that one positive aspect to come out of the credit crisis is that advisers are now selling more insurance than ever. He says for the first time ever last month, the gross written commission for insurance sales exceeded mortgage sales. “This change in product mix confirms that the Prestbury model is more capable than most to weather the current storm.”

One area of opportunity for networks to diversify into additional income streams has emerged with the launch of Newcastle Building Society’s new investment intermediary brand.

The building society last week officially rolled out Newcastle Intermediary Services, following a soft launch in June with 100 of Openwork’s advisers.

The lender is initially offering a range of deposit-based savings products, including capital-guaranteed structured accounts, instant savings accounts and fixed-rate bonds.

Commercial director Wendy Lee explains how the company previously offered these products through a select group of networks such as Tenet and Openwork but took advantage of a gap in the market to offer it on a wide scale to all IFAs and networks.

She says although the idea has been in the making for the last 12 months, the timing of it has turned out well for them.

“We recognised the power of IFA distribution but also a lot of mortgage brokers are now looking for other income streams. We are confident it will work,” she says.

Investment products could provide another source of income for mortgage brokers but Boulger is unsure that most brokers will have clients who are looking to invest money.

“It could be difficult for brokers to offer these products and a lot of mortgage brokers will not be sufficiently in tune with the investment market.”

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