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Round the houses

Our panel consider how complex mortgage products have brokers in a Catch-22 situation, inflation that is keeping the market guessing, the problem with mates mortgages and whether the regulator is doing enough to tackle fraud

The panel

Jonathan Cornell, director of communications, First Action Finance

Peter Wright, director, Plan Money

Alan Lakey, partner, Highclere Financial Services

Society of Mortgage Professionals chief executive Richard Fox recently warned that the growth of complex mortgage products risks damaging the industry’s reputation if borrowers fail to understand them. Is he right to be concerned?

Cornell: A degree of concern is justified. The thing with complex products is if everything goes swimmingly, nobody complains and everybody is happy. But what tends to happen if things do not quite work out as everybody thought is borrowers get angry and say, ’I didn’t understand this’. There is a lot of retrospection.

The onus should be on providers to educate and inform consumers, and to a certain extent brokers, about their products.

There is a pressure on brokers in that you can explain to some clients until you are blue in the face but they will never understand a certain product that you know is the right one for them, so it’s a bit of a catch-22.

Wright: If there are complicated products, one would assume they have been developed to fulfil a need. If the consumer does not understand, this just brings us back to the need for advice.

The industry should not be concerned about it as the more products that come back on the market the better. What the industry should be more concerned about is consumers dealing with them directly.

Lakey: Complexity is a double-edged sword. With a complex product of any sort, if I explain it fully to my client there is a danger that either they will not understand it or if they do, they will be so troubled by it they will not go ahead. Equally, if I do not explain it, there is a complaint in waiting.

Advisers I speak to, partic-ularly in the protection world, say there is a need for products to become simpler so that people know what they are buying and fully understand it.

There are products, not necessarily just in mortgages, that are so complicated I will have to spend a lot of time making myself fully conversant with them and then a similar amount of time explaining it to a client. It is not worth it as there are usually better alternatives.

Does last month’s surprise drop in inflation mean a rate rise is less likely this year?

Cornell: The chances of a rate rise this year are fairly slim. The Bank of England is arguing vociferously that all the inflationary pressures are temporary. The latest Monetary Policy Committee minutes suggest inflation might go above 5 per cent, so it is obviously deeply set on the path that the economy will correct inflation in time and it is concerned about what will happen to the economy if it raises the base rate.

Wright: The surprise drop in inflation seems to be because of other short-term circumstances rather than an ongoing trend. It is right that interest rates stay where they are at the moment as it should not be assumed we are on recovery road. The inflation figures are looking at what happened three months ago, not where we are now.

Lakey: There were newspaper headlines last week suggesting there would be no rate rise until 2014.

We do not know what is round the corner. This time last year there was pretty strong consensus there would be a rate rise in January/ February. At the beginning of this year, that was put off until March/April, that became May and now we hear it may be two or three years.
The truth is no one knows but it does make it less likely.

At the beginning of July, housing minister Grant Shapps called for lenders to offer ’mates mortgages’ to groups of friends clubbing together to purchase a property as a way of meeting people’s aspirations to buy in tough economic conditions. The Council of Mortgage Lenders has been sceptical about the idea. Are lenders right to be wary of ’mates mortgages’?

Cornell: Lenders already offer mates mortgages. If two friends want to get together and buy a property, they can. I think Halifax will accept more than two people on a mortgage quite happily, so the scope is there if they choose.

I think Shapps is missing the point that mates mortgages work reasonably well in a rising market because when they do need to sell the property, if they fall out or one of them wants to move in with their partner, there is more equity to be able to split out or it is easier for one party to buy the other out.

In a falling or flat housing market, whatever money was put in may get wiped out and one party will not be able to buy the other out.
I am incredibly sceptical, especially in the current house price market.

It is a sticking plaster and Shapps is simply trying to show the world he is still alive and can justify his existence.

Wright: Mates mortgages are dangerous things. Mates will get together in the pub and decide to buy together and then when they have lived together for six months, it fizzles out. This sort of relationship should be left to the rental market.

Lakey: Lenders are right to be cautious. Two friends buy and then one decides they want to move in with a partner, the other cannot afford to stay or the lender will not allow them to borrow the difference. I can think of many clients who have come to me in this predicament and there is no answer.Lenders are being cautious about everything at the moment, so coming up with new ideas when they have got limited funds and limited appetite for risk is not going to be a winner. I know it sounds politically cool but I do not think it is going to take off.

Last month, the FSA published the results of its thematic review of mortgage fraud and has delayed introducing individual registration until 2012/13. Is the regulator doing enough to combat mortgage fraud?

Cornell: Lenders need to work hard to eradicate mortgage fraud, as do solicitors, surveyors and brokers. The FSA is well placed to mediate between all those parties.

It is disappointing we do not have individual registrations as that would help remove some of the bad apples in the broker market, who are complicit in fraud. I do not know any brokers who wanted a delay on individual registration.

It is not just the FSA that needs to work on fraud but it is best placed to facilitate the argument among all the participants.

Wright: The amount of mortgage fraud that has gone on is almost embarrassing. I think the whole system needs to be looked at.

It is difficult to believe it is that hard to stop mortgage fraud. There are so many professional elements in place, mortgage advisers, solicitors etc. There has to be an easy way of stopping this but not enough effort, time and resources is put into a system to combat it. If you started making people personally accountable solicitors, accountants, surveyors, mortgage brokers that is going to be a deterrent.

It should not just be the regulator for financial services, you need to look at the governing body for surveyors and solicitors, they should all be working together.

Lakey: In a sense, it is no different to the misselling of any product but there appears to be a clear distinction between the quality of IFAs and that of relatively new mortgage brokers. We read almost every day of one broker or other being struck off.

The mortgage world has always been an easy place to thrive if you are a dubious adviser and there are plenty of lenders who will assist by offering loans that people can not afford. Just last week, I had a call from someone who had been offered a mortgage but they had to pay the broker a £1,500 fee upfront. I thought that practice had died out but clearly it has not. I find it very strange that the FSA, which is normally very focused on hitting the targets it believes are relevant, would leave individual registration on the back burner when it is pretty clear that would allow them to assess the worth of individuals.

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