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The clash of the codes

The European Mortgage Federation has recently agreed a voluntary pan-European code of conduct on information disclosure for lenders. Do you think UK lenders are likely to sign up to this and how would these requirements sit with FSA proposals for lenders to police the disclosure of intermediaries?

JM: I would have preferred to have the outcome of the two consultation papers from the Treasury and the FSA in order to provide a meaningful answer. I would suggest it would be unusual for any UK mortgage lender to sign up to any voluntary European code without knowing what is required of them in the UK.

JMaltby: I feel the FSA will want to ensure its requirements for information disclosure cover the items included in the pan-European code of conduct. In this way, we should avoid developing a system of dual regulation.

I think there needs to be one agreed code of conduct that everyone follows and then compliance is manageable and we can use this to address customer detriment.

If the two codes exist, this could have the opposite effect. Dual regulation would increase costs and timescales and could cause confusion for intermediaries and consumers. UK lenders will sign up to the code if it is consistent with the FSA proposals. If not, it is difficult to see the value and practicality of a second and voluntary code.

The practicality of lenders policing the disclosure of intermediaries has yet to be tested. There are many issues, not least of which is that lenders may not see the details of a case until several weeks after the point that disclosure is required from the intermediary to the borrower.

BD: I think it is too soon to say whether UK lenders will sign up to the European code. We need more detail from the FSA concerning the statutory regulation of mortgages before deciding.

There is potentially a considerable overlap between the European code and the FSA&#39s requirements and it is important that UK lenders are not expected to comply with, for example, two sets of disclosure requirements.

The European Commission&#39s invitation to European lenders to subscribe to the code is open for six months, by which time the FSA&#39s requirements should be clearer – allowing UK lenders to subscribe if we are comfortable with the way that the two regimes dovetail.

Seller&#39s packs are soon to go through the House of Lords. Assuming there is no major change in their composition, how do you see them affecting the market?

JM: There are three issues here – cost, who is going to pay for it and convincing the consumer that this will assist them in selling their property efficiently and quickly.

Although a pilot study was introduced by the Government, it was always likely to benefit certain disciplines within the mortgage market. At this point in time, who the beneficiary will be is not clear.

JMaltby: I welcome any initiative that improves transparency and the speed of transactions and reduces uncer- tainty. Many of the underlying principles of the seller&#39s pack are positive, for example, including as much information at the earliest possible stage, seeking early “in principle” offers and improving the speed of conveyancing.

However, there are many unresolved issues with the practical implications of the proposals. For instance, seller&#39s packs will be compulsory and it is feared they could add substantially to the already high costs of selling a home. These packs also have a limited shelf life. While in London, and other property hot spots, three to six months seems a reasonable amount of time to sell your property, in other parts of the country this is not realistic.

The home condition report may also cause confusion. Many lenders will require a full valuation to confirm the quality and marketability of the property. The accountability for the information in the seller&#39s pack and recourse for the borrower and other parties, including lenders, is also important.

My fear is that seller&#39s packs might not speed up the homebuying process and could potentially reduce the number of people wanting to put their home on the market, particularly in areas where the housing market is less buoyant.

BD: The advent of seller&#39s packs will mean that vendors will have to think very hard before putting their house on the market. With costs running into several hundreds of pounds, the speculative vendor who decides to “test the market” is likely to disappear.

Due to the up-front investment required, the supply of properties, initially, is likely to fall which may, based on the usual laws of supply and demand, drive prices up in some areas.

This is likely to be more acute in areas of low-value properties where the cost of the seller&#39s pack represents perhaps 3 or 4 per cent of the property&#39s value.

The advantages for purchasers, however, are clear. They will have access to far more information at the out-set and that, given the initial outlay, the vendor is more committed to selling. Given the competition among lenders to maintain market share, it is likely to result in more aggressive activity to win remortgage business.

West Bromwich Building Society is launching a mortgage broking operation this month. Do you see many lenders of West Brom&#39s size following its lead?

JM: Potentially yes. The trend over the last few years for lenders of all sizes has been to diversify into related areas.

JMaltby: I would expect other building societies to follow the West Brom&#39s lead and launch their own mortgage broking operations. Many building societies have great brands and distribution channels that reach a relatively broad cross-section of the public, often far broader than the reach of the products they offer themselves.

Other lenders will recognise it is of far more value to source specialist products from other lenders than to try to compete in all areas of the mortgage market themselves. For specialist lenders, it increases the distribution of our products and enables us to attract more potential borrowers.

BD: With increasing pressure on margins, it is inevitable that innovative lenders will explore new ways of defraying operating costs and generating incremental revenue.

West Brom is, quite rightly, looking to capitalise on its distribution and seeking to satisfy customers&#39 requirements in new ways. A declined mortgage application, from both processing and acquisition standpoints, is simply a cost.

By broking these cases, West Brom will generate fee income and incremental earnings from cross-sales. If the customer ownership issues are sorted out at the outset, customer retention will be enhanced. I think other lenders are bound to follow its lead.

Nationwide&#39s recent variable rate reduction seems to suggest it believes discount rates will disappear in the long term. Do you think this is the case or could the move cost Nationwide its slice of the new business market?

JM: All lenders have to come to terms with the cost of offering new business in relation to maintaining existing mortgage business. With the likelihood of more stable base rates for the UK market, longer-term mortgage products are more likely to overtake short-term discounted rate products, which have been a feature of the past years.

With this in mind, every lender&#39s share of the new market is more likely to be reflected in the type of benefits offered within their mortgage products.

JMaltby: I do not think discount rates and other new business incentives will disappear. Lenders will seek new ways of attracting business to their company with introductory rates. I believe the recent spate of variable rate reductions is part of lenders&#39 strategies to hold on to their customer bases.

By offering both existing and new customers the opportunity to have competitive rates, these lenders are seeking to protect their share of the market. I believe this trend will continue. In fact, those lenders not giving introductory rates or competitive deals will find themselves at a disadvantage in a fiercely competitive market.

BD: I do not believe the recent move by Nationwide will see the end of attractive discounted rates or incentives. Borrowers will always have different motives and requirements when it comes to selecting a particular product.

The remortgage market is driven by the choice and variety of products available. Many people choose a product that will give them payment relief in the early years of a loan and this is a strong determining factor when people look to remortgage.

In the purchase market, borrowers are looking for different features and benefits that suit their needs at that time. To offer a standard product will not allow for people&#39s differing requirements.

I believe lenders which dogmatically exclude incentives from their product armoury will limit their market proposition and will ultimately lose market share.

Is the Financial Services Consumer Panel right to say the Treasury set an unrealistic timetable for the FSA to assume its powers, thereby ruining the chance for a more comprehensive review of mortgage regulation?

JM: As an industry, we work from time to time within limited time constraints and when this is the case it is important that we use all the resources available to get the best possible outcome within those constraints. And that is the case in this instance.

JMaltby: More important than the timing issues is the limited scope of the Treasury&#39s plans. By excluding the regulation of advice, it has limited the FSA&#39s opportunity of giving a comprehensive review of mortgage regulation. How-ever, given this fundamental flaw, I welcome the approach and spirit of consultation adopted by the FSA.

If the timetable prevented full consultation, then the risk is the resulting regulatory framework becomes impractical to implement and does not address the central issue of customer detriment.

BD: Despite the aggressive timetable, the FSA has moved forward pretty steadily. However, the primary objective of consumer protection will not be delivered adequately by the new regulatory framework.

How much of this is attributable to the Treasury&#39s timetable is difficult to say but I suspect some significant comp- romises have been made. It is to be hoped that the scope and form of the regulations will evolve through continued efforts of both the lending sector and the consumer lobby.

Do you agree with Legal & General&#39s view that, following the introduction of the Homes Bill, househunters without an agreement in principle for a mortgage will be ignored by sellers of the most desirable homes?

JM: No. By desirable, I assume you mean prestige or crunchy gravel properties, which in my view would involve a buyer who is likely to be experienced, knowledgeable of the mortgage market and likely to be buying on the basis of low loan to value funding. If that is the case, it would be unusual for the buyers to require an agreement in principle as his status and financial situation would be sufficient for the seller and his agents to enter into a contract to buy the property.

JMaltby: I believe this practice is already in existence before the Homes Bill has been implemented. Currently, cash buyers get preferential treatment from vendors when it comes to buying any home.

Buyers who have sold their own property and have arranged a mortgage are much more attractive than buyers who have yet to secure a mortgage.

If you have a marketable home and can pick and choose your buyer, then sellers will always go for buyers in good positions because they can increase the speed and certainty of the sale. Agreements in principle are commonplace in today&#39s market and it is unlikely that the Homes Bill will have much impact on this.

BD: It is highly likely that, with the introduction of the Homes Bill, potential buyers without mortgage funding in place will be considered with some caution. Clearly, from a vendor&#39s perspective under the new system prospective purchasers who do not have mortgage funds in place are going to be less attractive than people who have the funding arranged when they make their offer.

The same thing happens today. People who make an offer for a property but have yet to sell their own are not considered as serious prospects until they have a firm buyer themselves.

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