Do you agree with the CML's prediction that the housing market is “more likely to experience a soft landing than a sharp shock” in its forecasts for 2003 and 2004?
Aitken: All markets are cyc-lical and subject to fluctuating investor confidence, and the property market is no exception. However, it is hard to disagree with the CML while unemployment and interest rates remain low and stable. Comparisons are inevitably made to the property crash in the early 1990s although the prevailing conditions are so much less likely to result in that sort of scenario. It is interesting to remember that the thriving and competitive niche and non-conforming mortgage market that exists today has its roots in solving the personal credit problems that resulted from the previous crash – perhaps showing that the sector is robust enough to deal with the sharpest of market swings.
Court: Given the benign interest rate environment, it is not an unreasonable assumption that a soft landing is the more likely outcome for next year.
Hurst: I think that this is an accurate view. We simply do not have the same wider financial factors that were prevalent prior to the last crash.
I do agree that there is likely to be a general slowdown in the market but not a sharp correction. Certain high-profile areas such as buy-to-let mortgages in regional hotspots such as London and the South-east might cause some concern, but this is a very small proportion of the overall market.
Do you think the voluntary code of practice on buy-to-let mortgages from the National Association of Commercial Finance Brokers will effectively plug the gap left by the absence of statutory regulation?
Aitken: Our preference would be for a single regulator to cover all mortgages, including buy to let. We believe that a high proportion of buy-to-let borrowers are not experienced landlords and do not enter into this sort of mortgage (and its risks) with an experienced commercial mindset and therefore they would benefit from the protection of statutory regulation.
A voluntary code is highly worthy and desirable but it does not carry the same weight as statutory regulation. After all, the mortgage industry itself was operating under a voluntary code when statutory regulation was judged to be a better option.
Court: The NACFB voluntary code is a series of general statements of good practice for buy-to-let advisers but does not set out specific or detailed rules on the format of disclosure, etc, and, as such, is not really a substitute for statutory regulation.
Hurst: There is little doubt that a voluntary code can work and work well, as has been proved in the mortgage market over recent years. All that is required is an industry-wide acceptance of the rules, which is the real challenge facing any voluntary code.
It should be recognised, however, that both the Treasury and the CML argue that buy to let should not fall within the regulatory framework. Although there have been calls from the industry to revise this stance, we share the belief that, as a commercial transaction, it is right and proper that buy to let is not regulated under a mortgage umbrella.
Mortgage lenders provide funding to people to purchase a roof over their heads and buy to let does not address this. Although we hold the view that regulation is not appropriate, we maintain that a strong duty of care should be provided by lenders. This affects items such as assessing affordability and restricting the number of properties allowed to ensure that borrowers do not overstretch themselves.
Additionally, it should be recognised that a solicitor is involved in the transaction, and acts on the client's behalf. To this end, we feel it is appropriate that the solicitor offers the appropriate advice to their client.
Do you agree with the Financial Services Consumer Panel attack on the FSA that its proposed mortgage sales processes, mainly filtering questions, will confuse borrowers?
Aitken: We believe that the filtering questions option needs a rethink. Statutory regulation must reflect the real world and, in a practical situation, borrowers may not make the fine distinction between “filtering questions” and “advice” – as the processes will be so similar.
In our CP146 submission, we have suggested that a category of “informed choice” may make better sense. Here, borrowers would be given enough information to make their own choice, and would certify in writing to that effect (more to make sure they fully understand they are not being advised than to provide an escape clause for firms).
Court: In some circumstances – particularly online transactions – the use of filtering questions is very appropriate. I would share the concern, however, that there is a real danger that customers subjected to filtering questions in other circumstances may believe they have received some form of advice. I think that further rules and guidance on the types of questions which can be used are needed as well as clear statements in the initial disclosure document that no advice has been given.
Hurst: First, the menu system proposed has met with widespread derision from brokers and IFAs alike. Second, the mortgage market has far more variables than other financial products and reliance on a filtering system would seem inappropriate.
If a filtering system really worked, then it could presumably work outside the scope of intermediary advice? If this is the case, why are over 50 per cent of mortgages in the UK arranged via inter-mediaries? The answer is in the fact that no filtering system could factor in professional experience and up-todate market knowledge which allows brokers to identify a lender having a service issue which may jeopardise the purchase of their clients dream house. The greatest risk from a set filtering regime is not that the answers are incorrect, is it simply that the wrong questions are being asked in the first place.
Should the FSA's comparative mortgage tables launched last month verify that data is correct to reassure consumers, as sourcing system Mortgage Brain is now doing for intermediaries?
Aitken: I think the question is trying to compare apples and bananas here. Obviously, Mortgage Brain only gives information about products from its lender panel – not the whole market. Product accuracy will be to give brokers confidence about their own compliance under the forthcoming FSA regulation of mortgage advice.
On the other hand, the FSA tables are providing consumers with a set of comparison tables that is totally independent from any selling process, and are not intended to be for the benefit of intermediaries.
Unfortunately, the FSA tables exclude a large number of significant niche lending sectors, for example, buy to let, lifetime mortgages (equity release), self-certification, and schemes for borrowers with an element of poor credit history – so they are of limited use to borrowers who cannot get a loan from mainstream lenders.
Court: In any system of this kind, accuracy of data is vital, and any steps that can be taken to improve this are welcome. Having said that, there is a considerable overhead for lenders in checking the correct use of mortgage product data in all the various applications where their details are quoted. It would seem sensible to try to develop means whereby verified data can be shared in a consistent way between different applications which use it rather than every application developing its own checking and verification processes.
Hurst: This is a very interesting issue that was raised as part of CP98. In CP98, it was suggested that lenders should be accountable for the accuracy of product data although they were not responsible for keying it onto the systems. As a lender, we provide timely and accurate information to sourcing systems and comparative table compilers but have no control on the subsequent promotion of this data.
Unless software is developed to allow lenders to physically enter data onto the systems themselves it is a tough law to enforce.
As an example, which I hope, is not too spurious, if Money Marketing syndicated a feature to a regional newspaper but when resetting the article prior to publication they made a few typos, who would be responsible? If lenders are to be responsible then we need the tools to satisfactorily discharge this duty.
Will seller's packs, set to launch in 2006 following their inclusion in last month's Queen Speech, achieve the objectives of eliminating gazumping and speeding up the transaction process?
Aitken: Although they happen at the same time, buying/selling a property and obtaining a loan secured on it are two distinct processes. If gazumping is seen as a by-product of long delays in the selling process and if the seller's packs can really speed up the transaction, then they will benefit consumers who may be caught in this situation.
However, seller's packs in themselves will not eliminate gazumping. In the meantime, providing fast-track mortgage offers and completions are already seen by many lenders as vital in winning and retaining business.
For example, we combine a fast track decision-to-completion process with Title Insurance across all loans – which already cuts out the need for much of the time consuming legal work – so the seller's pack concept is already lagging behind in this respect.
Court: Although seller's packs will certainly make the housebuying process more transparent, they are unlikely in themselves to do much to really speed up the process or eliminate gazumping. Any chain will still only move at the pace of its slowest member. Increased use of technology is probably more likely to deliver real savings in transaction times.
Hurst: The seller's pack has received a significant level of criticism over recent years, and not without good reason. Although we may applaud the principles behind the scheme there are simply too many practical restrictions. Issues such as lenders not accepting a valuation supplied by the buyer will create duplicate work and multiply costs to an unfeasible level. In addition, even with the time saving being targeted, there will remain more than enough time for gazumping to take place.
Rachel Court, national intermediary manager, Yorkshire Building Society
Stuart Aitken,director of credit, Southern Pacific Mortgages Limited –
Richard Hurst,communications manager,Future Mortgages