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Rock and a hard place for HBOS

Tanya Powley analyses a mortgage market turn-round as Northern Rock’s lending business has soared while giant HBOS has slumped

We are in the middle of the first-half reporting season for mortgage lenders and so far have seen a change in the fortunes of two major players.

After a profit warning in June, lending giant HBOS, which had a fifth of the UK mortgage market, revealed in its interim results last week that, after a series of pricing errors, its share of new lending had plummeted to just 8 per cent in first six months of this year from a 21 per cent share the previous year. This is its smallest share of new business for seven years.

HBOS also said its net mortgage lending had fallen to £4.3bn from £10.3bn in the same period last year.

Chief executive Andy Hornby admits that the slump is due to the pricing strategy introduced in the second half of 2006 which proved to be “largely unsuccessful”.

But he says that after taking corrective action to its pricing policy, HBOS recovered to its usual 15-20 per cent net lending range in May and June.

Hamptons technical director Jonathan Cornell says alth-ough HBOS has taken a big hit, he is confident it will recover.

He says: “It has got some work to do but we know it is are already working hard to recover its position. BM Solutions’ buy-to-let product pricing is incredible and we are doing bucketloads of business with it at the moment.”

London & Country mortgage specialist James Cotton says: “In some respects, it might be good that it has happened. HBOS has had to learn the bad way but it will not be making the same mistake again.”

With HBOS’s gross mortgage lending market share down to 19 per cent, compared with 22 per cent last year, the reduction has seen other lenders closing the gap.

Northern Rock, which overtook Lloyds TSB in the Council of Mortgage Lenders’ top 20 table of lenders to become the third-biggest lender in terms of gross mortgage lending for 2006, has seen its share of net mortgage lending grow at a spectacular rate.

It reported a dramatic rise in its net mortgage lending share to 18.9 per cent, up from 12.2 per cent in the first six months of 2006. Its net mortgage lending hit £10.7bn, up from £7.3bn.

John Charcol senior technical manager Ray Boulger says: “Northern Rock has been the biggest beneficiary of HBOS’s decline. Its biggest strength has been its retention strategy, which is working particularly well. It has got the strongest retention strategy of any major lender in the market.”

Cotton says: “HBOS is such an enormous lender that if it does lose a bit of business there is an awful lot of business to go round for everyone else.”

However, Boulger says Northern Rock needs to broaden the scope of the retention strategy that has been core to its success.

He says: “The only thing I would say is that it is frustrating that it only does this on a direct basis. I would like to see it open it up to brokers. The danger for Northern Rock is that brokers may feel they are missing out which might impact on brokers’ perception of Northern Rock.”

Cornell believes it might be difficult for Northern Rock to maintain its current level of growth as Nationwide, Halifax and Abbey become more aggressive.

He says: “Once Nationwide has finalised its merger with Portman, it will become a lot more aggressive in grabbing business so Northern Rock will have more competition on its hands.”

Alliance & Leicester saw a slight fall in its net mortgage lending share to 4.2 per cent from 5.3 per cent. Boulger says he is surprised as A&L has had some aggressive products.

He says: “One of the reasons that it might not be doing so well is that its maximum loan value is £250,000, which means it is cutting itself off from gaining a bigger share. One way for it to boost its market share is to have more products over £250,000 – even just to £500,000 would be a great help.”

Alliance & Leicester says its new areas, such as specialist lending, are performing well.

Cotton points out that these areas are unlikely to have made too much of an impact on its first-half results but could boost results for the second half.

He says: “When this becomes a bit more established, it might be able to fight Northern Rock a bit more.”

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