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Seeing the light

In the latest Money Marketing June With-Profits Focus survey of mortgage

endowment shortfalls, several life offices refused to disclose what

percentage of their reprojection letters were red, green or amber. Should

they be forced to make these

figures public?

Batchelor: As this type of mortgage repayment vehicle has taken a back

seat in recent times, with most consumers electing to take either repayment

or interest-only loans, it is unlikely that market-wide disclosure will

have an effect in the future upon the type of mortgage purchased. The issue

of a potential shortfall upon a policy linked to an outstanding mortgage is

one best solved between adviser, client, provider and lender.

Richardson: The important thing with this issue is that people who are

facing a shortfall are made aware and understand what steps they need to

make to rectify their situation and get back on track to pay their

mortgages. Mortgage-backed endowments are the dinosaurs of the financial

world and they are going the same way.

Lack of disclosure from life offices in this matter will just compound

their downfall as consumers seek perceived “safe” alternatives to pay off

their mortgages. Endowments will, of course, go on but mer-ely as savings

vehicles.

Mawdsley: Speaking as a reasonably well informed layman, I would guess

that most professionals in the industry believe they know and understand

why some companies refuse to divulge this information. As a marketing tool,

I believe the information, or lack of it, could be very useful both to

brokers and customers.

Yorkshire Building Society looks likely to be the first lender to offer

trail commission on mortgages. Will other lenders will follow suit?

Batchelor: I am aware that some lenders in the past have had trail

commission agreements with intermediaries or paid basis points on

originated mortgage books and it is int-eresting that Yorkshire is lik-ely

to launch such a scheme to protect intermediary introduced business.

For introducers, it is a regular income stream which can overcome some of

the seasonal peaks and troughs of the mortgage market. For lenders, it

makes sense not only for increased customer retention but also for the

cashflow advantage to this method of payment rather than just an initial

fee.

However, I feel that this method of payment will not be replicated by the

majority of the market as most intermediaries require cash today to run

their businesses. One issue which always arises is the potential negative

effect on a consumer in so much as the lender is tempting an intermediary

not to remortgage a client to protect income.

Richardson: Other lenders will no doubt continue to play a waiting game.

It is really a question of sustainability but lenders will not admit to

that until they have a case study in the shape of Yorkshire&#39s experience to

draw on. The important factors will be the level of renewal commission paid

and for how long. Also, whether it decides to scrap up-front fees

altogether and pay over a few years or pay less up front and less over time.

The upside to introducing trail would be if it encourages mortgage brokers

to stop churning business where it is not in the interests of the customer

to do so. The danger for those lenders that take the trail route is that

they lose business as brokers go for the up-front fee and remortgage their

client three years down the line for another fee.

Mawdsley: Yes, although, as I understand it, some lenders have already

been down this road. Historically, lenders have always had greater focus on

new business, existing customers always came second, and retention rates

tumbled. If there is a move to a more level playing field for products,

then offering trail commission will benefit their business from the

intermediary market, positively affecting their customer retention. But

this can only be the case if they get the rest of the marketing package

right.

If they are really interested in doing business with intermediaries in the

long term, the fees paid must reflect the efforts of their introducer for

both the initial business and the continuing retention of their mutual

client.

Paragon Mortgages has pulled out of the retail market because it fears

that relaxed lending criteria is making the mortgage market too risky. How

far do you think this is a legitimate concern?

Batchelor: The question posed misses one important fact. Paragon

Mortgage&#39s managing director John Heron was quoted as saying “there is

little or no return available against potentially high risks from the

combination of high demand for high loans to value, high-income multiples

and intense competition in the commodity sector. We see no purpose in

chasing this business when we have so much experience in buy to let.”

Lending of all kinds, whether for house purchase or personal reasons is

based upon the principle of risk versus reward. If there is little or no

return for a lender in a sector of the market, it becomes very difficult to

justify remaining a player in that sector.A recent CML report concluded

that there was no reduction in credit quality/lending.

Richardson: It looks like Paragon has pinned its reason for leaving the

mainstream on risk whereas in reality it probably just makes sense for it

to exit the retail market and concentrate on buy to-let where it has more

focus. Mortgage lending to consumers is just about the safest form of

lending a bank or building society can do because of the security it

affords, so I do not believe it can be the core reason.

Mawdsley: There have been a number of recent calls for the lending

industry to beware of a “relaxation” in lending cri-teria. The implication

being that there is an increased risk to the lender – and borrower?

Lenders have always faced the issues of balancing the needs and

aspirations of the customer with the probity of prudent lending. Paragon,

it must be remembered, is one of the few lenders with the transparency of a

public listing. It may be that Paragon has found it difficult to compete in

the residential sector when more profitable avenues exist in the niche

sectors of the marketplace

The Financial Ombudsman Service is being inundated with complaints from

borrowers over inappropriate loan payment protection policies sold to them

by direct agents of lenders. Should any tie-ups between lenders and

insurers – generally viewed as the problem – be made more transparent?

Batchelor: It is planned that there will shortly be further transparency

and greater control on the selling of this type of contract shortly as new

guidelines, which for the first time regulate the sale of general insurance

policies such as loan/mortgage payment protection policies come into force.

These will be laid down by the GISC and are intended to govern the

misselling of all types of general insurance.

Richardson: The relationship between providers and insurers undoubtedly

needs to be made clearer than at present. If it is not clear, then how can

the end consumer know what (and from whom) they are buying? Suitable loan

protection needs to be sold according to individual circumstances.

Providers need to ensure that anyone selling MPPI products has appropriate

levels of knowledge. In many cases, I think it is true that direct-sales

staff have minimal knowledge of the insurance policies they are selling so

it is not surprising to see a rise in complaints in this area. Improving

training and increasing transparency is essential.

Mawdsley: The catalyst for providing income protection was a change in

rules for mortgage payments by the DSS.

What failed to happen at the same time was the introduction of any

standards associ-ated with the sale of payment protection products.

Hindsight always gives 20/20 vision but I believe the acceptability of the

products sold in the early days of this immature market would not stand up

well against the products on sale today.

Since the introduction of these products the market has changed

dramatically, competition has improved the cover, and with the benefit of

experience, premium rates and the move away from single premiums has

benefited the customer. Having said that, the conditional sale of all

insurance products linked to mortgages and the relationships between the

parties involved should always be able to stand up to scrutiny.

With recent movement in money market rates, many lenders have been forced

to reprice their fixed rate mortgages. Do you think this indicates a

impending rise in interest rates and, if so, should borrowers be looking to

snap up fixed-rate products?

Batchelor: Whether there is a change in bank base rate or not, the rise in

money market rates has certainly brought about a change in pricing to many

lenders&#39 fixed and cap-ped rates. Also, away from the many economic,

political and European currency factors which influence rates, lenders have

for some time been heavily discounting fixed and cap-ped rates.

Currently, there are two-year fixed mortgages with five-year break-even

periods, which do not have overhanging early redemption fees. How long can

this type of product continue to be offered if a lender&#39s existing mortgage

book is remortgaging away to other lenders at an unprecedented level?

I think it is highly likely that we have seen the lowest fixed-rate

products for some time, especially if there is any stalling by the

Government on joining the single European currency.

Richardson: I think the re-pricing of interest rates by a quarter point to

5.5 per cent (by the end of this year) is an over-reaction based on the

view that the UK may enter Emu soon. The past history of fixed rates versus

variable rates show it is pretty much 50/50 in terms of winning the gamble

when deciding to fix or not.

There is always a risk and even the experts get it wrong more times than

right. The danger is losing out on lower payments if there are further

falls in interest rates. Whenever looking to fix mortgage payments it is a

good idea to go for a short fix of, say, two years with no lock-in to allow

flexibility for a change in circumstances.

Mawdsley: At the last change in the base rates, two-year money became more

expensive, a clear indication that we were at the bottom of the interest

rate cycle.

With the Government&#39s position on the euro becoming clearer, combined with

the apparent building of inflationary pressure in the economy, many think

the last cut in rates was one too many. The signs for a further hardening

of interest rates are there.

In my opinion, a fix today is the right choice, the next question should

be – over how long should you fix? If I were looking for a mortgage today

with the possibility of a move within the next three years, I would want

the flexibility of knowing that today&#39s five-year deal was portable.

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