Is the mortgage market about to return to a healthy, stable “normality”? Are market “shocks” a thing of the past now?
I pose these questions as we have had a series of positive statements in recent weeks about market improvements. Mortgage lending has increased over the summer months according to the CML, in particular to first-time buyers.
This has bucked the usual seasonal trends. More lending activity reflects ongoing borrower demand, much of it pent up over the five-year period when funding has not been available to help all prospective borrowers buy their own homes.
We have also returned to the days when we have over 10,000 mortgage products available from a diverse array of lenders (more choice, but also a recipe for consumer confusion?). We have more competition as the latest CML league table of the largest 20 lenders shows that the market share of the largest five lenders shrank in 2012 (markedly so in the case of Santander). I anticipate that this trend away from new business by the largest five lenders continued in the first half of this year, based on the Bank of England feedback about the first half 2013 performance of the Funding for Lending Scheme.
As a consequence of cheaper funding, however, mortgage pricing has fallen with some products available at less than 2 per cent for two-year fixed rates. I just hope borrowers do not forget that rates will go up some time, and that they need to plan for higher monthly payments and not over-borrow as rates are low.
Recent reports highlight the increase in market share of intermediary business, now well over 50 per cent and returning to levels last seen pre-2007. In one sense, this change is not surprising. It is a consequence of (arguably) too much product choice in the market. However, the interesting suggestion is that the trend will continue due to the impact of non-advised sales no longer being permissible after the Mortgage Market Review is implemented next spring.
My own expectation has been that lenders will feel they have little choice but to invest in advice services through their direct distribution channels, and will be under pressure to push more borrowers through branches, phone services and the internet channel to get a return on their investment. If they are to succeed, however, they will have to simplify product criteria, provide manageable choices for borrowers, and make efficient use of technology. They must ensure that whatever channel is chosen, they provide a customer-friendly process which complies fully with the new regulatory rules.
Of course, all of these changes need to be in place to meet a strict regulatory deadline next April. If there is any slippage, lenders will need to have a Plan B – lending through intermediaries. So, there may continue to be a spike upwards in intermediary cases in this year’s fourth quarter and in 2014.
However, by this time next year, I would expect the picture to reflect the 50:50 split between direct and introduced business that has been more usual in the last few years. Indeed, with simpler product choices, the split of new business may even move in favour of more loans going direct to lenders in the longer term.
What could put a dampener on a steady growth in the market? We still have legacy issues to be managed by some lenders, including the resolution of Co-operative Bank’s capital shortfall and the separation of TSB from Lloyds Group. There are many others I could list.
As I have discussed in previous articles, the Help to Buy mortgage guarantee scheme could inflate the market and create a house price bubble. New critics have emerged in recent weeks with negative comment and concerns from the Adam Smith Institute and the Intermediary Mortgage Lenders Association.
As a counterbalance, the new governor has reaffirmed a determination that the financial policy committee will act if systemic risks start to arise. I am not so sure that I would risk a housing bubble being part inflated, and then deflated, as many of the key FPC tools are blunt instruments. No one would want an FPC cap on high loan-to-value loans as a response to a government scheme designed to encourage lenders to offer these loans.
As the final Help to Buy rules have still not been announced (for a scheme due in January), it is difficult to make a final judgment about the market impact. The political drivers make me nervous about the outcome for both lenders and consumers.
Another dampener on the market could be the attitude of senior management to innovation and risk if they feel that they could be targeted by the new conduct regulator. The most obvious, but not only, high-risk area is poor handling of complaints, particularly on payment protection insurance cases.
The Ombudsman figures published recently are stark. Six monthly complaints have now reached 327,035, of which 86 per cent relate to PPI complaints. The majority of complaints relate to a small handful of firms, and I suspect senior managers will have ever more challenging conversations with FCA staff about how they justify their Fos numbers and uphold rates. Fos reports a variation between 2 per cent and 98 per cent upheld in favor of consumers.
For those businesses at the top end of the range, the question must be asked if Fos is being used in place of proper internal complaints procedures that should resolve issues at an earlier stage?
What is the picture on mortgage complaints, as a comparison to PPI? Interestingly, the largest three lenders in 2013 were the Bank of Scotland (927 new cases this year, and 30 per cent of past cases upheld for the consumer); Santander (774 new cases, 26 per cent past cases upheld) and Northern Rock Asset Management (676 new cases, 31 per cent past cases upheld). The outlier with most past cases upheld for the consumer, but I presume a smaller number of cases, was Southern Pacific at 47 per cent.
When one takes into account the importance of the mortgage in most people’s finances, the scale of administration of the loan over a long period, and the number of outstanding mortgages, the number of cases seem comparatively low to me. As the cases are more complex, it is also to
There are definite reasons for optimism, but legacy issues and new regulatory expectations still cloud the horizonSo we should not read too much into a single set of figures, but where a pattern has emerged over time, senior managers are skating on very thin ice. Public “naming and shaming” of individuals by regulatory fines, or a call to give evidence before the Treasury select committee, are real risks in our brave new conduct risk world.
And the FCA has announced its thematic review of complaints handling, so it is looking to see where firms and individuals have the wrong culture or are indifferent to the wrong consumer outcomes.
The Ombudsman service was supposed to be a last resort, not the first choice of firms. Once fines of individuals become a staple diet of enforcement announcements, senior managers in all areas of these businesses could revert to risk aversion and avoid any innovation that might have unintended consequences.
I see a mixed mortgage market picture. There are definite reasons for optimism, but legacy issues and new regulatory expectations still cloud the horizon, and so I do not expect the journey to a healthy, stable, ‘normal’ mortgage market to be straightforward or short term.
Michael Coogan is chairman of Shaping Tomorrow and a strategic adviser to Loans Warehouse
Key points
* Mortgage lending has increased over the summer months, according to the CML, in particular to first-time buyers
* As a consequence of cheaper funding, however, mortgage pricing has fallen with some products available at less than 2 per cent for two year fixed rates
* Six monthly complaints have now reached 327,035, of which 86 per cent relate to PPI complaints
