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The rise of the super-banks

Smaller mortgage lenders have been watching the emergence of the super-bank these last few weeks but will they perish under their imposing shadows?

It is clear that big lenders are getting bigger. Lloyds TSB is set to absorb HBOS, Abbey and Alliance & Leicester will now lend under the Santander flag and the world’s financial investment banks have begun to amalgamate and merge. And those who have not merged have had to be rescued by the authorities, namely Northern Rock.

It is clear that the smaller intermediary specialists are getting smaller. Earlier this month, Merrill Lynch revealed the majority of Wave’s workforce were at risk. GE Money, aside from receiving a £1.12m FSA fine last week, raised its rates by as much as 1.6 per cent. GMAC RFC also took a blow last week as Bradford & Bingley only took up £750m of a possible £1.75bn mortgage asset deal.

Building societies have been hit too. Recently, Derbyshire and Cheshire admitted defeat in the face of the credit crunch and merged with Nationwide.

London & Country mortgage expert David Hollingworth says: “It is amazing to think of the small intermediary lenders who are not there anymore but there is not much lending coming from smaller lenders at all.”

So what of the surviving smaller lenders which once held such a pivotal role in the intermediary mortgage market? Will they be able to be the David to Lloyd TSB’s Goliath?

All Types of Mortgages sales and marketing director Dale Jannels says: “The only way for the small lenders to survive now is to go adverse. The superbanks will only be looking at prime lending.

“These huge banks will be operating a simple computer says yes or computer says no system. But many people will not fit their mould. Smaller lenders will need to go back to the manual underwriting – real people making common sense decisions. And there is a massive gap right now for that.”

Money Partners director of communications Bob Sturges agrees that a gap, or as he prefers a “clear blue water”, has developed between the mighty high-street banks and the smaller lenders.

He says: “Before the crunch lending models between lenders like us and the high street brands were blurring – big banks were looking at sub-prime and smaller lenders were moving into near prime. But now we have seen the models separate once again. The big boys are retreating from specialist lending and we are left with a small group of specialists.”

Stroud & Swindon sales and marketing director Linda Will says: “There is less manoeuvre for smaller lenders now as all that has happened has decreased consumer confidence and decreased confidence in the wholesale markets.

“Smaller lenders will have to sustain lending now with low costs, efficiency and a broad spread of money. There will be little or no growth for the time being, the smaller players will just have to stay alive.”

So what will become of the small lenders, left adrift while Lloyds, Barclays and Abbey take more of the mortgage market share?

Will sys: “To survive small lenders need to do what they do well. They need to stop looking over their shoulders and concentrate on their own propositions.”

Mortgageforce technical manager Katie Tucker says: “The smaller lenders who survive will need to take some risks, but at the same time remain mostly conservative. Building societies are a great example. They can consider lots of specialised mortgage deals and can create regional nuances but are conservative at their heart. The likes of Lloyds TSB are obliged by shareholders and cannot make discreet changes to underwriting.”

There are some building societies that are fighting against the mega-banks. Coventry surprised the whole mortgage market when it revealed excellent half year results at the end of August. The small lender revealed net mortgage lending increased by 24 per cent to £851 million, representing three times its normal market share. This equated to almost 3 per cent of the total market, and around a quarter of total net lending by building societies.

So what did Coventry do to pull up alongside the likes of HBOS and HSBC in market share?

Coventry head of sales and Godiva managing director Colin Franklin says the answer is simple. “We just listened to intermediaries,” he says. “We are not interested in what the other banks do, we always avoid any knee-jerk reactions to market turmoil. We stay consistent and follow through with our pledges.

“Intermediaries like lenders to be consistent. It is not rocket science.”

Coventry has made intermediaries happy and it paid dividends. So will intermediaries turn their back on the big lenders? Could the rise of the super-bank mean smaller lenders benefit from more intermediary support?

Hollingworth says: “Intermediaries always complain about the big lenders and always threaten to boycott them but they always go back. Simply, for cheap simple mortgages with good fees the big banks have the best choice”

Sturges says: “Brokers will not turn their back on the big banks but they know that they thrived on spec- ialist lenders in the past.”

He says demand is not the issue when it comes to smaller lending surviving. He says the fundamental issue for small lenders is funding.

Sturgess says: “Specialist lenders have not been able to work their business models so they have had to scale down or pull out of the market. The biggest issues haven’t gone away, regard- less of the big lenders.”


Last convert to fall

Bradford & Bingley was part-nationalised this week after the Government and the FSA decided that it could not fund itself as a bank.


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