Can you click it?

In a world characterised by a microwave mentality, increased automation of the mortgage application is generally hailed a good thing. The advent of the online decision in principle (DIP) and the ability to process applications online can help save mortgage advisers valuable time and money. They also help sate the appetite of borrowers accustomed to a consumer culture dedicated to instant gratification. Now borrowers can find the house of their dreams and literally be given mortgage decisions within minutes rather than days or weeks.GMAC has gone as far as to claim that its online decision system can save mortgage advisers up to £35,000 pa. It argues that because customers can receive a binding decision from day one, fewer of them go elsewhere for advice, the lender also claims that it gives advisers around two hours more administrative time on each case and that the freed up time leads to more sales and more completed cases.But it is not all plain sailing and some of the technological developments in the mortgage scene have their downsides too and throw up other issues. GMAC is one of a small band of lenders, including BM Solutions, Alliance & Leicester, Mortgage Express and Halifax, that has completely automated its decisioning system. As a result, over 95% of its applications receive a binding decision online. Effectively, the human element has been removed. The broker types in the information and the computer does a credit check, credit scores the application and makes the decision there and then. Provided that the information submitted is not fraudulent and the valuation proves sound, the decision made will be honoured.Mortgage advisers themselves report their growing use of online mortgage applications. Sue Martin, a director of Francis Townsend, says that about 80% of the firm’s mortgage applications are conducted online, definitely an increase on the previous year. IFA Adrian Kidd of Mint Financial Services reports that his use of online mortgage applications has risen from around 25% last year to 50% this year. However, both are happy to use electronic and paper methods. Kidd says that where speed is paramount over rate, he will generally use an electronic application method. “Sometimes there are great benefits,” he says. “You can get them to do the applications as quickly as possible.” Tick box mentalityPresumably, with automatic DIP, only those applicants who can tick all the right boxes are successful. Anyone who in the days before automation would have proved borderline and subject to underwriting is likely to find it difficult to apply online and may have to resort to more specialist and probably more expensive lenders. According to brokers, provided that everything is straightforward, online applications work fine. The moment that someone’s circumstances become a little more complex, things become less straightforward. Martin tells how recently a client applied for a lifetime mortgage. She lost the property, found a new one and reapplied. Meanwhile she went up an age bracket, so the purchase price, loan amounts and her own age details had changed. However, it took a while to sort things out as the old application was still showing on the system. While advisers may be able to obtain a decision in principle fairly instantly, the rest of the application process may not be quite so speedy. GMAC is one of only a few lenders that have managed to automate the entire mortgage application process. Some lenders have an automated DIP system, but after that the rest of the application must be done on paper. Kidd suggests that some companies have the same turnaround time for applications whether they are done online or by paper, because they simply key in the information again. Effectively, there is no advantage in sending electronic applications. For example, advisers have complained that with Abbey’s system, paper and online applications appear to take around the same length of time to process. Abbey admits that it does not prioritise online applications over paper applications. It offers a 10-day guarantee for mortgages up to 75% loan-to-value, but that applies to both online and paper applications.The other main disadvantage of using the postal system is that if an application arrives after the specific rate applied for has been withdrawn, the lender may decide not to honour it. The truth is that some lenders do and some do not. Another big advantage of automation at every step of the process, is that it provides a valuable audit trail without generating unnecessary paper. Some lenders’ systems allow the creation of initial disclosure documents, fact finds and key facts illustrations (KFIs) all of which have to be given to the customer at the start of the mortgage application process. AffordabilityEven the calculation for how much a customer can borrow has been automated. Increasingly, lenders are doing away with old fashioned income multiples and coming up with affordability calculators. These will take account of income and financial commitments, such as outstanding loans and monthly credit card payments. Some are so sophisticated, they will take account of whether there is one salary and whether the applicant is single or married and whether they have any children. Private school fees and the use of a nanny may also be taken into account in calculating affordability. Another important factor that affordability calculators take account of is interest rates. Obviously, where rates are low, affordability is greatly enhanced. However, calculators will also apply a stress test, theoretically raising the rates by 2% or 3% – or a realistic scenario in light of economic conditions – and consider the likely effect on the applicant’s circumstances. These will be combined with a credit score to determine exactly how much someone can borrow. However, this can lead to another problem thrown up by technological progress. An adviser may decide to browse various lenders’ systems in order to find the maximum that each lender can offer his client. The problem is, in so doing, he may leave a credit footprint on file in each of the places at which he searches. Once there are three or more in a short space of time, his client’s credit score may be lowered. The systems do not make a distinction between would-be borrowers who have been refused credit because of a poor record and those who are simply shopping around. Ray Boulger, senior technical manager at John Charcol, is critical of lender systems that leave footprints. He points out that both HBOS and Alliance & Leicester allow affordability calculations to be made without leaving a footprint. He says that if those lenders can do it, why cannot others? The effect is to dissuade shopping around, the very opposite of what the FSA wants to see happen. He argues that it is at the very least against the spirit of treating customers fairly to damage a potential customer’s credit status. KFIs – the factsIn their short existence since they were introduced last October, KFIs have proved particularly controversial. The FSA says that where lenders provide them to customers, lenders are responsible for their accuracy. However, where brokers have obtained KFIs from a sourcing system such as Mortgage Brain or Trigold, for example, or have generated them themselves, they are responsible for the accuracy. FSA rules require lender-produced KFIs to be 100% accurate, while advisers producing KFIs via sourcing systems have a 1% tolerance limit for inaccuracy – leaving little room for error.Ian McKenna, director of the Financial Technology Research Centre (FTRC), contrasts the situation with the way that key features documents for life and pensions products can be generated by sourcing system The Exchange. Throughout the process, the lender remains responsible for information being correct and compliant. “It’s a classic example of differing processes,” says McKenna. “There’s a single regulator, but depending on the type of product, the regulator’s process is different. The problem is that in the mortgage world, the sourcing systems refuse to guarantee the accuracy of the KFIs they produce.”“We cover around 28,000 schemes on our system,” says Mark Lofthouse, chief executive officer of Mortgage Brain. “But we can’t force lenders to verify the details that they provide. Anyway, it’s unrealistic for a small company like ourselves, relative to the lenders, to guarantee the accuracy of every KFI in the market.” Trigold employs 20 people to check the accuracy of the data on its system. Bill Safran, chief executive officer of the firm, says that they work closely with lenders to verify products. While he acknowledges that it is in the best interests of lenders and brokers to have accurate information, Trigold covers 46,000 products each with around 100 data points. In agreement with Lofthouse, he says that it is not feasible to guarantee the data. Who’s responsible?In the face of the sourcing systems’ refusal to guarantee accuracy, many brokers have taken to approaching lenders direct. shows the availability of electronic KFIs and the status of the data. Of the 17 lenders that responded, all allow instant online delivery of their KFIs and most make them available via one or more of the main sourcing systems. The second table shows, however, that, without exception, they will take responsibility only for the quality and accuracy of their own KFIs, not those produced by the sourcing systems. As McKenna says, we can only draw our own conclusions about why other lenders have not responded to the survey and therefore do not appear in the tables. Not all lenders have the facility to produce KFIs electronically. For most advisers, the sourcing systems are much more convenient to use. However, Boulger suggests that it is a dangerous game for advisers to rely on the sourcing systems alone and not obtain the lender’s KFI, even if it is not immediately available. He says that he has seen mistakes introduced by sourcing systems into data that has already been verified. John Charcol’s answer to the problem has been to develop its own KFI generating system, which went into operation from 1 July this year. “We’re responsible for verifying what we get from the lender and we compare it with what we have on our system,” says Boulger. He says that there have been occasions when lenders’ KFIs have been wrong. However, he also admits that coming up with their own system is not a solution open to any but the very largest IFA firms. Ultimately, their best option is to look to the lenders to supply the information, for which at least they will carry the can. Martin at IFA Francis Townsend says that she much prefers to go direct to the lender for a KFI, so of course it is helpful and much quicker if they are made available online. Time permitting, most advisers can use the sourcing systems as a starting point, but then go to the lender for verification. Other systemsPerhaps the answer lies in the development of a system similar to The Exchange, whereby lenders can feed in their KFI details and brokers can easily access them. Both Mortgage Brain and Trigold have come up with systems that allow brokers to input their clients’ information so that it feeds into lenders’ back offices and pre-populates their application forms, saving them from having to re-key information. However, take up is patchy. Lofthouse says that eight lenders representing around 25% of the mortgage market have made their KFIs available via its Mortgage Trading Exchange (MTE) system. Another 12 are in the process of hooking up their systems so that their KFIs will be accessible. He says that including KFIs, MTE handles around 3,000 transactions a week. It is available across the market even to those who do not use Mortgage Brain as their sourcing system. Trigold has 60 lenders signed up to its E-trading centre (ETC) and probably has around 60% of brokers in the market. It is about to make ETC available in a stand alone format free to the whole of the market. It will have an open interface so that other systems can communicate with it. No doubt brokers would welcome a more centralised system. Origo is working on coming up with some open standards for such an idea and there is plenty of discussion in the market place as to whether this is feasible. For lenders that have spent time and money developing their own systems, however, the idea of a centralised system is likely to prove unappealing. It could dull the competitive edge that they have spent time and money developing in the unique features of their own systems. KFIs expand shows the number of pages in a KFI. Since this is information for consumers’ use, brokers do not want to be burdening them with great wads of information. However, by the time that lenders have finished including all the information the FSA requires, some KFI documents are starting to look quite thick. The FSA has been concerned about the size of some lenders’ KFIs and has had one to one talks with some of them about how they can be reduced. But as McKenna says, short of producing all the information in tiny print, there is not a lot that can be done. The main danger, however, is that consumers will not read all the relevant information. Part of the problem is simply that the FSA requires each section of the KFI to be on the same page, but the printouts from some lenders’ systems leave large gaps between each section. Other lenders have simply had too much information to include. Boulger points to the complexity of the conditions on Halifax’s tracker mortgage products, for example, which took up a lot of space when included in the KFI. SecurityThe mortgage sales process relies on the secure transfer of people’s personal details. For advisers accessing a range of lenders’ systems and sourcing systems and trying to obtain accurate electronic KFIs, there may be a large number of passwords to remember. Most systems need to be logged into. Some require a password comprising a combination of letters and numbers, other systems specify passwords of not more than six characters while still others can be made up of numbers only, no letters. Consequently IFAs will have at least three or four passwords to memorise. “If you’re independent and use the whole of the market, you may have umpteen passwords to issue to members,” says Boulger. Nevertheless, advisers cannot afford to be complacent about security and careless with passwords. Identity theft is on the increase and the sort of information required to obtain a mortgage is exactly the kind of thing thieves are after. ValuationsAnother development that has the potential to speed up the whole mortgage application process is the emergence of desktop valuations. In other words, a valuation report automatically generated on the strength of the information provided by the Land Registry and sales of other properties in the area. Clearly it will save time and money. A conventional drive by valuation probably costs upwards of around £50 a time. The desktop version is likely to cost half of that at most. The question is how reliable will desktop valuations be? Andrew Boddie, head of marketing for Standard Life Bank, admits that they pose a degree of risk for both lenders and borrowers. “They have the potential to store up a nasty surprise for later if the state of the property has not been checked.” He suggests that a desktop valuation might be appropriate where, for example, a property changed hands only six months or so previously. Little is likely to have changed dramatically in that time. However, where the time that has elapsed is more like three or four years, it may be less appropriate. Boulger suggests that as more and more data is made available online, the quality and reliability of desktop valuations are likely to improve. He also says that to reduce the risk of a nasty shock in the future, lenders are likely to commission a valuer to do a sample audit to ensure that an appropriate price is placed on the property. As mortgage application processes are increasingly becoming automated, there is a danger that only those who can tick all the boxes will be able to obtain a mortgage easily. Fortunately, everyone is at a different stage in the automation process and has a different motivation. Advisers themselves are mostly prepared to embrace the electronic revolution and only a small minority – around 2% – never apply online, according to figures from the Association of Mortgage Intermediaries.Mortgage sourcing systems have their own systems to promote and some lenders have theirs. For the moment, however, while electronic processes proliferate, the connectivity issues remain fairly outstanding. As Safran says, with 130 lenders with various back office systems to agree common standards, it may take a while.