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Stay ahead of the game

Our panel of experts discuss whether lenders are fuelling the 1tn debt crisis, the future of packagers and HLCs.

I s there still a place for higher lending charges or should they be scrapped. as some sub-prime lenders have already done?

Barrett: There is a place for higher lending charges in the market but only if they are a method of providing access to a product which could not otherwise be available. We have always believed in transparency for the market and higher lending charges should not be treated as a hidden income stream. Lenders who charge a higher lending charge but fail to provide good products will find their practices hard to justify.

Smith: Mainstream lenders led the way in removing higher lending charges on lower loan-to-value loans some years ago. Indeed, this week, Woolwich removed the remaining charges across its range. Most sub-prime lend-ers reflect their assessments of risk in the higher rates they charge, so higher lending charges may be less relevant.

Laker: There is a place for higher lending charges, if the rate differential is great and, of course, these charges do not just apply to sub-prime cases. For some lenders, the trade-off against higher lending charges is a more attractive rate and, in particular, for first-time buyers it makes the monthly amount more affordable. Generally, the higher lending charge is added to the loan. If this is calculated in stages, this means you only pay the charge on the amount of loan over the higher lending charge threshold, so if the loan to value is only just over, it will not be too high.

Is the FSA enforcement team doing enough to crack down on non-compliant mortgage advertising?

Barrett: It is still early days for regulation. There were many who failed to be fully ready for all aspects of regulation and mortgage advertising is no different. This should not be an excuse for allowing non-compliant mortgage advertising. The rules of MCOB are there for a reason and any ads seen to mislead consumers should be cracked down on.

Smith: The FSA is deploying considerable resources on this. It will be able to address this without embarking on field visits. It may take a little time to eradicate non-compliant advertising but it will certainly happen. Apart from the FSA activity, the industry is doing a good job “shopping” dodgy advertisers to the FSA.

Laker: This is a huge task considering the amount of websites there are. However, it is the most easily accessible and clearly visible route for the FSA to look at. It will be able to trawl through newspaper ads and websites and identify the obvious offenders and arrange to see them. This will take time and it is too early to judge but it will be an ongoing task and there will be casualties. Until these become public, brokers may be lulled into a false sense of security.

More than 75 per cent of the packager market could be wiped out in a year, according to the PMPA. Is this a fair estimate?

Barrett: It is true to say packers, as we know them, are not going to survive. The old packaging model has no place in the regulated market. We are likely to see a dramatic reduction in the number of packagers in the market over the next 12 months. The ones who will survive will have developed USPs and worked out ways to add value to the mortgage chain.

Smith: Packagers have a major challenge to prove to lenders and intermediaries that they are adding value in the mortgage process. If they can, and show the services they offer give real value for money to all parties, then they will survive and prosper. If not, their time will have ended. The second pressure comes from the advances in electronic trading. As lenders get closer to intermediaries with e-trading, the space for a packager in the transaction is reduced.

Laker: It is certainly a possibility. This current climate is going to be tough, and with all the changes and costs involved around doing business in the new environment, only those with strong financial backing and a clear strategy will survive. Pack-aging is labour intensive and needs volume to make it viable, and with online technology offering instant decisions, some of the reasons packagers exist could be eroded and everything will be down to service.

As the FSA underlines its mandate for electronic reporting which will come into effect in July, are sole brokers equipped with the resources and the time to deal with these requirements?

Barrett: No sole broker can afford not to be ready. Brokers are obviously under a lot of pressure but they should make time and plan for this as anything done last minute can take 10 times as long and not be as effective. Technology in the market is key, as we have seen in the last 18 months, and brokers should make sure they are up-to-date with the market. This is essential if they are to stay ahead of the game.

Smith: This is an area where the benefits of belonging to a network which has invested in technology, are clear. All firms have been faced with significant challenges to meet new requirements in the last six months. It would not be a surprise if some smaller firms and sole traders struggle to meet some of the requirements.

Laker: We will no doubt find out very soon. I am concerned that not enough brokers have put the necessary structure in place to provide the information in the format required, within the timescales required. This is another reason for being part of a network, where this ceases to be a problem.

We could see many brokers considering appointed representative status if the reporting provides them with a headache and the overall cost of being compliant is a burden.

Will decisions in principle become the thing of the past this year?

Barrett: Decisions in principle are already outdated. At BM, we scrapped the Dip when we launched the One Minute Mortgage 18 months ago and have never looked back. Brokers can receive a binding decision in less than a minute online and the rest of the market is likely to follow suit by scrapping the woolly Dip process over the next year.

Smith: As electronic links between intermediaries and lenders improve and systems allow single data capture by intermediaries but also the placing of the case with several lenders without rekeying, the need for Dips will reduce. If dealing with lenders with full data is a slick process there is less need to check out a lender’s initial view on a case.

Laker: They are used on a regular basis and I cannot see why they should disappear. However, I understand many sub-prime packagers do still offer to Dip the case before the lender has been decided and then place the case, which, as I understand it, should not happen under FSA regulation. The Dip, if it includes a credit check, sho-uld be done after the lender has been selected. There are, however, many different views on this subject.

With mortgage debt set to hit 1trillion, according to the CML, are lenders acting irresponsibly and fuelling the debt crisis in the UK?

Barrett: It is unfair to say mortgage lenders are acting irresponsibly. It is in every lender’s interest to act prudently and responsibly and under regulation lenders are bound by the FSA to do so.

To lend to people who cannot service the debt is not good honest business sense. Although 1trillion does seem like a milestone number, evidence shows that loan-to-value ratios are not increasing and the figure could be signifying the fact that the value of the UK’s housing stock has risen rather than a debt crisis. A bigger concern for the UK is second-charge and doorstep lending.

Smith: The 1tn figure makes a good headline in the tabloid press but is irrelevant as is talk of a “crisis”. Mortgage arrears, although rising sligh-tly in recent months, are still at historically low levels and levels of available equity are at an all-time high. No lender wants to lose money and no one has any interest in lending money to people it does not think will repay it. So, no, they are not being irresponsible in relation to mortgages. Pers-onal debt is another matter, however, and credit card companies, in particular, probably need to tighten up. Closer FSA regulation of credit cards can be expected.

Laker: The culture has changed. Our parents’ generation hated debt and would worry if they had money owing and would not rest until it was repaid. The new generation has been brought up on debt and do not worry about how long it takes to pay it back or even when it will ever be paid back.

People consolidate debt on a regular basis, using their bricks and mortar as security. We are a nation of homeowners and this is seen as the investment that will provide security for debt and ultimately the means of repaying it. Can you blame lenders for providing the funds?

Panel MembersColin Barrett, head of products, BM SolutionsStephen Smith, director, housing marketing, Legal & GeneralSally Laker, managing director,Mortgage Intelligence

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