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Our panel consider the fate of employed self-cert, the fallout from the US sub-prime crisis and brokers’ proc fee structure.

The Panel

Paul Hunt – head of marketing, Platform

Victor J Jannels – group executive chairman, All Types of Mortgages

Rob Clifford – managing director, Mortgage Force

Do you agree with the commentators who say that sub-prime buy-to-let is too risky for borrowers who already have adverse credit history?

Hunt:

Not necessarily, although it is an area that we are treating cautiously, mainly because it is not clear how much demand there is for such products, especially at the higher-adverse end.

There is no doubt a market for the almost/near-prime type of borrower and we have expanded this part of the range to cater for this but historically we have found that any borrower who cascades down from our conforming buy-to-let schemes has difficulty meeting the minimum monthly rental yield, as the higher rates charged make it more difficult to meet the rental calculation needed.

Jannels: The investment market, in whatever format, has the potential to trip you up. That said, a potential borrower who has suffered from adverse credit should not automatically be deemed unsuitable in a buy-to-let investment environment.

It will depend upon the severity of the credit history, with lenders needing to demonstrate a sensible can pay, will pay under-writing mentality. If other factors are taken into account, such as a sensible loan to value, the applicant having a personal financial stake, rental income delivering the mortgage payment plus a margin, then this should not deter either borrower or lender from taking a cautious step in this sector.

Clifford: No. Sub-prime borrowers can perform perfectly well and would need to make a 15 per cent personal stake available. Many are so classified due to just a small default or CCJ.

I agree with Peter Beaumont at Mortgages plc who says that this is a misguided view and that just because you have had credit problems in the past does not mean you will in the future. Borrowers with an impaired credit history can prove to be good landlords and can use property investment to restore and maintain their financial position. Buy-to-let investment is more about the property than the individual.

Do you think Hamptons Mortgages’ Kevin Duffy is right when he says that brokers’ procuration fee structures may change so that they are paid based on the performance of the loans they put through?

Hunt:

It is an interesting concept, especially within the non-conforming arena. Performance of loans is a critical factor within this sector, especially due to how many of these loans are funded, but assuming the broker has performed an adequate fact-find, I am not sure how much extra influence he has in determining the ongoing performance of the loan.
Also, the usual questions around retention schemes within non-conforming are still not answered, as if the borrower has sufficiently repaired their credit and could apply for a high-street loan, surely it is the broker’s duty to arrange this, no matter what retention scheme is available, as this will undoubtedly be better for the client.

Jannels: We are probably going to see a variety of payment routes and loyalty options in the future. It is difficult to say what will work best.

Kevin makes a valid point and one which lenders may be inclined to favour, particularly if it leads to a higher quality of completion and serviceability. Some lenders already operate this structure in the packager/ distribution sector, so while it may be being adopted more widely, it is not a new concept.

The key issue is, where do the percentage markers sit and for how long are the statistics valid in terms of moving the introducer between quality levels?

Clifford: No. I do not agree with the prediction, although I appreciate that Kevin’s views have merit and that there may be some value in such an approach if it comes as part of a genuine partnership between lender and broker. However, brokers introduce business in good faith and it is up to lenders to design lending criteria and to take responsibility for persistency.

James Taylor at West Bromwich predicts it is more likely that we will see greater use of trail fees, as hinted at by Callum McCarthy recently, and I strongly agree.

Why do you think many of the high-street lenders, HBOS, Northern Rock and Woolwich apart, saw their market share slide in 2006?

Hunt:

It is widely recognised that 65-70 per cent of all mortgage business conducted within the UK is now done via mortgage intermediaries and this increase, I believe, is a direct result of mortgage regulation.

A full mortgage interview with one of the high-street banks can take between one and two hours and this surely dissuades many from actively shopping around whereas you can have one interview with an intermediary and have a wide range of options immediately available.

Another reason for reducing market share may be the increased amount of competition and, despite continual monthly increases in mortgage lending recorded by the Council of Mortgage Lenders, the traditional brands are now experiencing competition from new entrants, which shows no sign of abating.

Jannels: This market is increasingly competitive. New lenders are developing ever more innovative products at competitive rates while consumers are shopping around more as rising interest rates have made them more rate-aware and many of the high-street banks whose credit card divisions may be facing bad loans have focused on the prime market.

We must also consider the impact of buy to let – a market where the high-street lenders are not particularly present but which, in 2006, represented 11 per cent of mortgage lending.

Clifford: Winning market share is based on product pricing, service delivery and some unique or distinct offering, and many lenders struggle to provide any of these in a very competitive and oversupplied market.

Increased competition from US investment banks, new entrants and specialist lending brands from established lenders has made the UK mortgage market increasingly competitive. More and more lenders are diversifying their product offerings, increasing the pressure on the mainstream lenders, and so it is inevitable that some have seen their market share suffer.

The US sub-prime mess is deepening. How confident are you that no ill-effects will be felt in the UK?

Hunt:

I do not think anyone should feel complacent but it should not cause too much concern at the moment.

It is often said that when the US sneezes, the UK catches a cold but it must be remembered that the UK housing market is very different to the sector in the US.

A shortage of housing stock in this country results in more buyers than there are vendors and the demand will keep house prices rising or, at worst, stable. Also, even the most pessimistic of economic commentators only predict a couple more interest rate rises, and so, while interest rates are still at relatively low levels, mortgage repayments for many people are still a low proportion of their monthly income.

Jannels: There is little doubt that the situation in the US is worsening, an example being the profit warning issued by HSBC due to losses arising from its recent US mortgage acquisition.

Problems in the US appear to stem from lenders responding to severe competition by opening up their book without adequate sub-prime lending criteria and marketing loans in a manner likely to increase borrower default or other losses.

There are significant similarities between the US and UK but there are also differences. However, the situation there is a wake up call and while we have more stringent underwriting processes, this is not a reason for complacency. Any similar deterioration of standards here will, in the long run, be detrimental to the industry as a whole.

Clifford: Very confident. UK lending policy has remained much more prudent than in the US sub-prime sector, particularly in the area of affordability. The US sub-prime market has been a source of significant learning for UK sub-prime lenders, many of which are owned or funded by US institutions.

This insight and first-hand experience should mean that it is extremely unlikely that similar conditions will develop in the UK. However, the drive for market share might lead to unwise relaxation of lending criteria and insufficient risk pricing among the weaker players.

With the news that Money- facts is to revamp its sourcing system to go head to head with Trigold and Mortgage Brain, do the existing duo need to raise their game?

Hunt:

As we have seen in the specialist mortgage sector, increased competition results in better products for all and requires existing players to improve their offerings, and this is no different to the ongoing sourcing system battle.

Mortgage 2000 is involved in this as well, as they have made substantial improvements to their Encore system, especially in the area of non-conforming products – as has Trigold with ENC.

Mortgage Brain is also developing its system to cater for this market, so it is important that the new Moneyfacts’ sourcing system enables intermediaries to source non-conforming products accurately. This may eventually be the litmus test in terms of the success of this system in the long run.

Jannels: This is good news. The increase in competition must drive innovation and improve product and service across the board. Trigold and Mortgage Brain are both serious players and, given the commitment and investment in their offerings to date, I do not doubt that they will raise their game.

They must also consider their clients who have bought into using and paying for their services, ensuring that their loyalty is repaid with top-quality service. There is no substitute for competition to keep all participants on their toes and this will be a good thing for the market.

Clifford: Any service provider should continually assess and evaluate its proposition compared with the competition. In my experience, Trigold has developed its platform significantly and in response to the requirements of clients.

Success for Moneyfacts may depend on its budget for incentivising users to switch. If it gets its marketing and user-acquisition strategy correct, Trigold and MTE stand to lose market share.

A leading broker recently said employed self-cert should be banned because if someone is employed, they should be able to prove their income. Do you agree?

Hunt:

I do not agree that it should be banned but caution should always be applied in such cases to ensure that the reasons for self-certifying are reasonable and widely understood.

The FSA are understand- ably cautious about these types of cases, and as a result, such cases are only acceptable where a high level of income is commission/bonus related, where other income sources are non-PAYE or the applicant is in a contract deadline or auction sale.

In such cases, there can be an argument for self-certifying, but brokers and lenders have a responsibility to ensure that any lending done on this basis is done responsibly and that the relevant facts are understood.

Jannels: It does seem to be a reasonable stance but circumstances vary and we must be able to cater for a range of earnings’ models.

Not every employee has sold their soul to one employer, some may have other income streams, and it does not make sense to disadvantage them.

This is where the intermediary can add value. It is imperative for, and incumbent on, brokers to know their customers and only present cases to lenders that stand scrutiny.

It is the responsibility of lenders to monitor the performance of such products and I have no doubt that, if they feel it is being abused, they will act accordingly.

Clifford: No. Constraining consumer choice would be a retrograde step. There will remain a place for self-certification for employed applicants, many of whom have bonus or secondary income that is not easily substantiated and can form a significant proportion of total income.

Self-certification also supports a rapid application process and can form an important element of a broker’s offering to clients. I support the view of Julian Wells at Mortgages plc, which is that the adviser must explain the costs of the mortgage clearly to the borrower and ensure that they are fully aware of the impact of interest rate rises.

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