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Uncharted waters

What does the withdrawal of the IF, Bank of Scotland and Astra brands from intermediated distribution mean for the mortgage broking market?

Cornell: Seeing any lenders withdrawing from intermediary distribution is not good news but this needs to be put into context. I do not think anyone was expecting there to be the same number of Lloyds’ brands dealing with intermediaries so some cuts were inevitable.

Bank of Scotland has been a stalwart of the intermediary sector for many years and most brokers will have fond memories of some of the more creative deals it used to do but recently it has struggled to find its niche in the market. IF has been pretty quiet of late so it will not be missed too much. Astra was a good lender but I doubt its volumes will be greatly missed, considering the overall size of the market.

White: The collapse in the wholesale money markets, while obviously affecting all lenders to some degree, is specifically detailed as the reason for the Astra withdrawal. On a positive note N&P claim they will “reopen” when the market recovers, but the loss of another intermediary-based lender remains a negative for the mortgage broking market.

In regard to the withdrawal of IF and BoS, this just adds more fuel to the dual-pricing debate, which again is not good news for the broker. I acknowledge that in the past the intermediary sector has benefited from dual-pricing and some would suggest we simply take it on the chin now the situation has been reversed.

However, these are extraordinary times and the impact of this ongoing round of dual-pricing is having a much more wide-spread effect than many perhaps realise.

Cuming: The withdrawal of these players is yet another example of the erosion of choice available through the intermediated distribution channel. This, together with the continuing practice of dual-pricing and the stronger emergence of direct players such as HSBC, Lloyds and the Britannia Building Society is undoubtedly putting increased pressure on mortgage brokers.

This is compounded by the high level of media activity highlighting direct propositions, such as the HSBC rate matcher and the Lloyds “lend a hand” deals. Given the ever increasing product complexity, consumers need sound, impartial advice that cannot be offered by a single lender. The sidelining of the broker sector has to be at the detriment of the borrower.

Several advisers have been publicly urging people interested in fixed-rate mortgages to fix now before rates rise. Do you agree that rates will rise? If so, when do you anticipate an increase and by how much do you expect fixed rates to rise?

Cornell: We are already seeing fixed rates rocketing up. This month, Nationwide increased its lowest-LTV five-year fixed rate by 0.86 per cent, from 4.98 per cent to 5.84 per cent. Other lenders are now following suit and the ones who have not repriced in the last few days will be forced to do so very shortly. Otherwise they will be inundated by applications they do not have the capacity to process. There is so little competition in the market that the lenders will simply follow each other upwards and many are increasing in anticipation of further swap-rate rises.

It is difficult to predict exactly how far rates will go up but I suspect we will see more big increases followed by rates dropping slightly when lenders realise they have gone too far.

White: Base rates will definitely rise again. While remaining cautious, if pushed, I subscribe to the more optimistic school of thought that the worst of the recession may be over and I therefore anticipate a series of 0.25 per cent increases commencing no later then January 2010. Indeed, based on some very nascent signs of “economic green shoots” it has been reported that there has been a surge in City traders betting on a rate rise before the end of the year.

This growing optimism has also been reflected by a sharp increase in swap rates. Accordingly, those who are contemplating remortgaging to a fixed rate should certainly consider their options right Continued from previous pagenow rather than waiting. To hang on, even for a couple of months, could mean a further 30-40 basis points rise in pricing.

Cuming: Events are already proving the validity of this prediction, with Halifax, Nationwide, Chelsea Building Society, Principality Building Society, Cheltenham & Gloucester and Abbey raising fixed-rate deals by an average of around 0.25 per cent recently. In the past few weeks, two, three, five and 10-year swap rates have all risen on average by more than 0.5 per cent, a significant hike in such a short period of time. Given the fact that the Government has pushed the Bank of England bank rate down to almost zero in an attempt to reduce the cost of borrowing and boost the economy, this shows just how divorced their action has been from controlling mortgage rates. Unfortunately, I would expect the next release of fixed-rate products to continue the upward trend by at least another 25bps.

Several house price indices have shown increases in the last couple of months. Without trying to read too much into any one particular set of data, do you think house prices are starting to stabilise?

Cornell: I am rather suspicious of the figures that indicate house prices have stopped falling. If you look at most of the macroeconomic data currently available it is hard to see how prices could possibly stop falling, especially when you take into account rising unemployment.

I think the figures are based on very low levels of supply of property which have been put on the market. Once more people decide to sell, prices will drop further. There is so little mortgage lending that even those who are keen to buy are struggling to get mortgages. I expect we will see prices stop falling at the end of the year.

White: There are a number of reasons why we should continue to be cautious about any continued increase in house prices. Recent figures issued by both the Council of Mortgage Lenders and the British Bankers’ Association show particularly weak lending levels and lenders continue to show little appetite to lend, particularly at 90 per cent LTV levels and above. Until this can be rectified, many would-be purchasers will remain locked out of the market.

Those looking for further evidence of green shoots will point to increased first-time buyer activity in the market, positive noises from estate agents and the recent Rightmove average asking-price figures which also showed an increase. However, the fact remains that it is early days to be suggesting a full-blown UK housing market recovery.

Having said that, I do remain cautiously optimistic that the worse of the recession may be behind us.

Cuming: House prices are dependent on many factors, not least consumer confidence, availability of funds and cost of borrowing. Recently, we have seen the effect of the wait and see consumers deciding to take the plunge and either buy for the first time or move house. The availability of historically low fixed-rate deals over the past few months may have persuaded those who were waiting for the bottom of the interest rate cycle to act.

However, we are still not seeing inclusive lending. In other words, volume lending is aimed at those with significant deposits, which excludes huge numbers of prospective buyers. This, coupled with the huge volatility in the employment market, will have to change before we see real improvement in house prices.

The Bank of England’s latest statistics suggest that one in 10 mortgage borrowers is now in negative equity. Is this a serious brake on housing market recovery or a statistical quirk?

Cornell: Sadly, I do not think this is a statistical quirk, although there is no way of knowing how accurate these figures are. Negative equity is not necessarily a problem for homeowners until they try to move home. Those who have no intention of moving will just keep paying their mortgages as normal and, if this is feasible, should try to reduce their mortgage as fast as possible to help build more equity .

When the market stops falling, there will be a number of homeowners who would normally move house but who will be unable to as a result of their negative equity, and this will slow down any potential house price increases.

White: It is neither a serious brake on recovery nor a statistical quirk. House prices have fallen dramatically, meaning those individuals who entered the mortgage market at its height and many more who were once benefiting from what appeared to be a reasonable 15-20 per cent equity cushion, now face negative equity.

Significantly, the need to refinance is not quite so pressing as mortgage borrowers are enjoying historically low SVRs. The brake on housing market recovery is generally being caused by the continuing lack of wholesale liquidity in the money markets which is adversely affecting the ability of banks and building societies to lend. Normality comes in the form of some sustained level of FTB activity which, although increasing, will remain difficult for some time as the appetite to lend higher LTVs has virtually disappeared in a market where limited funding translates to very conservative risk lending policy.

Cuming: It is difficult to predict negative equity numbers with any certainty but the brake on the housing market goes much deeper than that. Unless a prospective borrower has a high level of savings, in the current environment, house sales need to generate a minimum of 10 per cent deposit plus costs for the onward purchase to give the seller any chance of getting a new mortgage.

Even given this level of deposit, borrowers will be facing significantly higher interest rates and very strict criteria that may deter them from taking action at the moment. My pessimistic conclusion has to be that stagnant house prices and higher-LTV mortgages will definitely act as a brake on recovery.

With buy-to-let repossession rates soaring and financing hard to find, what does the future hold for the small-time or accidental landlord?

Cornell: I would expect the majority of buy-to-let arrears to be concentrated in the new-build flat market. Chronic oversupply, coupled with people buying through property clubs and other middlemen, means getting enough rent on these flats to cover the mortgage will be tough, hence the number of repossessions and situations where the lender starts collecting rent from the tenants.

Accidental landlords should not be too badly hit but undoubtedly the lack of competition in the sector is making it tough for all landlords unless they are cash buyers.

White: Historically, buy-to-let lending was an area of the market particularly reliant on the wholesale markets so it is no surprise that lending is down by around 50 per cent. Products that have recently been available have tended to be relatively expensive, creating a financing problem for aspiring small-time landlords.

This is not quite the same problem for the accidental landlord who typically will already have mortgage finance but is unable or unwilling to sell the property.

However, with the residential property market now bumping along the bottom of the recovery curve, it is reported that landlords are buying up properties at low prices and lenders are beginning to feel more secure about their risk exposure, despite a 30 per cent increase in repossession activity.

The demand for rental property is also rising and therefore if the “investment” is affordable, sufficient yield should be generated to appease both the small-time and accidental landlord.

Cuming: The official buy-to-let market is shrinking rapidly proving the lack of availability of funds and need for higher rents and bigger deposits are definitely deterring new entrants into the sector.

More worrying is the growth in the unofficial buy-to-let sector. This is the undetermined number of houses bought with a residential mortgage where the homeowner has moved out and moved tenants in for a variety of reasons without telling the lender.

Obviously, these tenancies are unauthorised and, as such, the tenant has absolutely no protection in a repossession situation. In addition, lenders are sitting on a higher risk than anticipated. This will be a trend that the industry will be watching with trepidation.

Following the collapse of Network Data, do you expect to see other mortgage networks close for business?

Cornell: Things will continue to be hard for those networks that have traditionally specialised in just mortgages. Unfortunately, Network Data made big investments in Hips, which must have been a significant drain on its resources.

I think there will be further consolidation in mortgage networks. The IFA networks’ income streams are not dependent on the mortgage and housing markets so they will fare better. Hopefully, if other networks do struggle, they will be able to find a home for their ARs to avoid them being unable to trade.

White: Many intermediary firms are in uncharted territory having been established during the “nice decade” and built successfully throughout the housing boom. Those days are well and truly over and a new way of thinking and working is required.

It is safe to say that those who have relied on their business success through the provision of mortgage advice will not be able to beat the recession by sticking to just the one sector. The financial advice needs of consumers move beyond mortgages and it is important that intermediary firms have the vision to recognise this.

Cuming: The one feature that all remaining mortgage networks have in common is an inspiring entrepreneurial approach. They are led by innovative and driven management teams who refuse to lie down. You only have to look at Network Data as an example. OK, they collapsed in the end but what a fight. It is this spirit, I believe, that will be the saviour of those left in the market.

I expect some change to business models, some reprioritisation of focus and potentially some mergers and acquisitions but I am hopeful we will not see any more closed signs.

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