Taking a look back in time, the credit crunch caused the mortgage market to collapse in size from £363bn in 2007 to just £135bn just three years later in 2010. This had a number of consequences, one of the most serious being the decimation of the number of mortgage advisers. While it is hard to know the actual number of advisers in the market without individual registration, the Association of Mortgage Intermediaries recently estimated that the number has fallen from 40,000 at the height of the market to less than 20,000 now.
There are a number of reasons for this – one was the lack of liquidity in the market, but there were many others. Lenders became frugal with their lending allocations, hugely reducing the amount that they were lending. This was partly down to the complete drying up of the securitisation market, restricting the funds that lenders had access to and then the government’s capital adequacy rules stipulating that lenders had to build their balance sheets in order to prevent another crash by holding more money in reserve.
The money the lenders did have they then preferred to lend directly to the consumer. Lenders introduced dual pricing, saving their best rates for their direct channels, only topping up through brokers and typically a very limited distribution through the big networks or mortgage clubs. This led many brokers who were not part of these networks unable to get access to the rates their clients needed and resulted in many of them going out of business.
In addition to dual pricing, lenders who specialise in direct to consumer, such as HSBC, became much more aggressive and significant in terms of their market share.
Previously the market was vibrant with a lot of business written in self-certification, adverse credit and buy-to-let, all products which consumers would have gone to brokers for. But then most of these areas dropped out of existence, with buy-to-let arguably the only volume survivor, while there is also a low-volume market in slight adverse and credit repair.
In more recent years some of the better advisers have lost their livelihoods by being struck off lenders’ panels because they were either complicitly or naively caught up in fraud. Some of the brokers who operated at the more dubious end of the market set up as introducers. They still had their book of clients and caught out many an unwary adviser by passing fraudulent cases.
The impact that all of this had on the consumer was to make it very difficult for them to get a mortgage. There has been a huge amount of pent-up demand for some years now. Some people cannot move house or remortgage because they were reliant on a self-certification mortgage as they could not prove their income. Others were suffering from adverse credit and suddenly found that lenders no longer wanted their business, while some were either trapped in negative equity or could not raise a large enough deposit to get on the housing ladder or to take the next step to buying a larger property.
The large number of brokers that have left the market means that there are a huge amount of orphan clients who now do not have a broker to keep them up to date on the options available to them when they come to the end of their mortgage term.
With the upswing in the market that is most definitely taking place, the challenge for brokers is to target the orphan clients. The mortgage market increased in size to £135bn last year and is expected to rise again to £156bn by the end of 2013. Government initiatives, together with a slow increase in consumer confidence, means that in the past few months some of that pent-up demand is being released and people are returning to the market.
In addition the pendulum is now swinging back towards the broker. Back in 2010 only about 45 per cent of mortgage business was done through a broker, but now anecdotal evidence shows that almost 60 per cent of business is completed through brokers. It looks like this will increase even more, especially post-mortgage market review when almost all mortgage sales will need to be advised.
Not only will lenders who deal direct to the consumer have to train all their mortgage staff to give advice, it is estimated that the mortgage sales process will increase from about half an hour to two and a half hours. This alone will have a positive effect on brokers as there are likely to be three types of lender:
* The large high street lenders will initially try to offer all the advice themselves, although some are already showing signs of increasing their use of brokers with retention fees for intermediaries who keep their clients with the lender.
* The small lenders which have never had a direct arm will continue to put all their business through mortgage brokers.
* The medium-sized lenders. This is where the largest shift is likely to occur as these lenders will increasingly need to use brokers and form strategic relationships with one or two mortgage distributors. I estimate that some medium-sized lenders could swing to putting in excess of 90 per cent of their mortgage business through brokers.
The one limiting factor that will stop the pendulum swinging back towards broker is if there are not enough brokers to meet demand. We are already seeing this situation with surveyors. At the height of the market there were roughly 7000 chartered surveyors, now there are 1500. With the market pick-up recently there is already more demand for valuations than can be met. The same is likely to happen with mortgage brokers.
David Copland is director of mortgage services for the financial services division of LSL Property Services
Key points
The mortgage market collapsed from £363bn in 2007 to just £135bn in 2010.
Ami estimated that the number of mortgage brokers has fallen from 40,000 to less than 20,000.
The pendulum is now swinging back towards the mortgage broker,
