Last April, the biggest piece of mortgage regulation in a decade came into force and changed the industry forever.
The Mortgage Market Review was first floated in 2009 to address lax lending standards during the financial crisis that allowed the market to balloon to over £360bn-worth of gross mortgage lending in 2007.
Most industry experts accepted that the market was out of control and that changes needed to be made to how the mortgage industry operated.
The rules, which came into force on 26 April 2014, have been in place for almost a year and have affected every broker and borrower in how they apply for mortgages.
Self-certification mortgages – dubbed liar loans – are dead, while interest-only lending has been scaled back significantly since the FCA insisted that an appropriate repayment vehicle should be in place.
All loans are now income-verified and expenditure is scrutinised much more closely than before, increasing broker workloads and client demands.
But there have been many positive developments such as the requirement for mandatory advice on mortgage sales, bringing direct-only lenders into the broker fold.
Lenders are also paying higher proc fees as a result and reporting better-quality applications from brokers, driven by higher regulatory standards.
Some brokers say the crackdown on criteria has driven down prices as lenders dare not relax their requirements in the brave new world.
Mortgage Strategy investigates how the biggest rule change in a decade has shaped the market in the past 12 months.
Council of Mortgage Lenders data shows a 9 per cent drop in volumes in February this year – the latest available figures – compared to February last year.
Lending has fallen by 25 per cent on a monthly basis, from £16.8bn in April 2014 when the MMR was introduced to just £13.4bn in February. Lenders point out that there are typically fewer mortgages at the start of a year so seasonal adjustments should be taken into account when making indirect comparisons.
The CML says lending volumes are expected to improve this year and the February figures are due to one-off factors. It expects last year’s stamp duty reforms alongside improving jobs and earnings data to boost approvals throughout 2015.
There are other factors affecting the mortgage market this year. First, the MMR was closely followed by action by the Bank of England’s Financial Policy Committee, calling for lenders to limit loans above 4.5 times income to 15 per cent of new lending.
Second, a Prudential Regulation Authority stress test demanded that lenders raise more capital, which had a direct impact on mortgage lending.
GPS Economics economist Gary Styles says lenders may have pushed through more mortgage deals ahead of the MMR, thereby distorting the market.
He says: “The overall impact of the MMR on volumes has been modest when you consider what was expected 18 months ago.
“The biggest impact is how the rules created distortions in when lenders lent mortgages.
“If there is uncertainty about the rules, you get the sort of bunching of business in the run-up. It is [due to] the uncertainty rather than to the MMR rules themselves.”
Last year, the FCA said there was a rush of non-income verified mortgage sales in the run-up to the MMR, with 20 per cent of all sales not verified in the second quarter of 2014.
FCA head of mortgage sales Lynda Blackwell said in September: “It looks as if there was a bit of filling of the boots going on before everything was switched off.”
Overall, it seems that a buoyant UK economy has sheltered the sector from the tough new mortgage rules imposed by the FCA and the Bank of England.
To create a direct comparison, in the final nine months of 2013 there was £145.4bn-worth of gross lending, versus £158.8bn in the same period in 2014, representing growth of 9 per cent.
Despite steady volumes, the market has changed. All mortgage borrowers must now prove their income and explain their detailed spending to inquisitive lenders.
Borrowers report some lenders asking about the cost of their haircuts or daily newspapers while, more controversially, others have counted voluntary pension contributions in affordability calculations.
Pensions minister Steve Webb has campaigned to get mortgage lenders to change their criteria so that their actions do not deter a savings culture.
He has intervened to ensure that brokers do not advise borrowers to drop their pension contributions in order to obtain a mortgage.
John Charcol senior technical manager Ray Boulger says lenders have also operated greatly varying approaches to assessing childcare costs since last April.
“We had a number of lenders that treated things like childcare very differently,” he says.
“Some would assume the same level of expenditure whether you had one child or 10, and others would assume higher expenditure if you had more children, especially pre-school age. That did not become apparent until the MMR came into being.”
Brokers report that it is now more difficult for self-employed borrowers to obtain a loan because they struggle to find the documents to prove regular income.
Lenders began moving away from interest-only mortgages when the final MMR rules were announced in 2013 and the past year has confirmed that trend.
Similarly, lenders pulled back from lending to retirees before the MMR rules came into force, in anticipation of the changes. There are much stricter age limits on lending into old age now.
Brightstar managing director Rob Jupp says: “The market has not changed as dramatically as the man on the street thinks it has. Most lenders were getting their processes ready and making sure they were compliant about six to nine months before the MMR. We didn’t just get to the point [last April] and there was a big change. [In reality,] we are almost a couple of years in to the MMR world.”
He adds: “You need an occasional decision that is irrational but good brokers challenge lenders if it doesn’t make sense and provide supporting material.”
Another more positive issue created by the MMR has been lenders’ relentless focus on price as mortgage rates have plunged to new depths.
Two-year fixed rates have plunged as low as 1.18 per cent while 10-year fixes have appeared on the market for under 3 per cent in spectacular new lows.
Boulger says the MMR has created an environment where lenders cannot compete on criteria under the new rules – so they compete on price instead.
“Lenders have more money to lend and they have been more competitive, mainly on price,” he says.
“If it wasn’t for the MMR, they would be competing more on criteria as there are plenty of areas where criteria are tighter than they need to be while still being a cautious lending policy.”
Lenders say there has been a cultural shift that has made brokers operate to higher professional standards.
Nationwide managing director of group intermediary sales Ian Andrew says brokers are submitting better applications as a result of the MMR.
“We are seeing much better-quality applications from intermediaries, which means we can process more quickly and don’t have to keep asking for more information,” he says.
“Nationwide and other lenders have worked hard getting the message across to brokers that there is less to-ing and fro-ing if applications are packaged properly.”
Financial Inclusion Centre director Mick McAteer, who is also an FCA non-executive director, says the MMR has improved the reputation of the mortgage sector.
“There is a more sensible approach to lending generally but it has also retained flexibility where necessary,” he says.
“Overall, standards have become more responsible and there is a more measured approach to lending. It is the combination of a more realistic approach to prudential regulation – the creation of credit – and more sensible sale and distribution of mortgages. All along the supply chain, it is working better.”
The biggest cultural change has resulted from the FCA’s decision to make advice compulsory on all mortgages since last April.
The move was hard won after heavy lobbying from the Association of Mortgage Intermediaries and has changed everything for brokers.
Since last April, there has been a flood of lenders using brokers for the first time as the direct-only behemoths have folded.
The Post Office was the first to crack in May, just two months after the new rules rolled out. The company – part of Royal Mail, which was privatised in October 2013 – has started to sell mortgages through the Legal & General network and L&G Mortgage Club’s Nouveau proposition.
In December 2014, Bank of Ireland launched broker lending through LSL Property Services, with a view to a wider rollout this year.
Then in February 2015, Tesco Bank confirmed it would start lending through brokers next year.
In an interview with the Daily Telegraph, Tesco Bank chief executive Benny Higgins admitted the bank had been using only a “modest” section of the market and had been forced to expand.
While the actions by these lenders made big news, the biggest turnaround came from brokers’ bête noire, HSBC.
For years, HSBC had prided itself on being a direct mortgage lender and its expansion was based on headline-grabbing rates that were available only through its branches.
Not any more. Last October, HSBC stunned the market by announcing it would lend through Countrywide and later roll out to the wider market.
Nationwide’s Andrew says: “The big lenders, such as Barclays, Lloyds Banking Group, Santander and ourselves, have supported the intermediary sector for some time, but now more players are entering.
“It is good to have more competition from the likes of Bank of Ireland, HSBC and Post Office. The market should be bigger this year, growing from £220bn to £250bn, and there is more focus on intermediaries. It is great for the sector.”
Your Mortgage Decisions director Dominik Lipnicki agrees that lenders are using brokers because they want more volume in a larger market.
“The amount of mortgages being sold by brokers has increased massively and will go on rising, so lenders need to get involved,” he says. “Most lenders have been struggling to meet their lending targets through branches and to train staff to full advice levels in time. They all need to lend more.”
Moneyfacts data, compiled for Mortgage Strategy, indicates an 11 per cent surge in the number of mortgage products available to brokers in the past year, rising from 2,034 last April to 2,251 today.
Within those figures, the number of products available to brokers and through branches has rocketed by 30 per cent, from 887 to 1,150, while broker-only deals have remained static, with 1,147 available last April and 1,101 on the market today.
These figures occur in the context of an overall increase in mortgage deals, with direct-only deals increasing by 13 per cent from 1,647 last April to 1,855 today.
The extra intermediary lender competition has seen the trend towards declining proc fees reversed for the first time in years.
In 2012, proc fees were heading below 0.3 per cent for standard mortgages, but the market is now averaging payments of around 0.4 per cent, with higher fees for specialist deals.
Santander and Lloyds Banking Group both have proc fee systems that reward brokers based on the quality of business submitted.
Brokers have also argued that the longer caseloads required post-MMR justify higher proc fee payments from lenders.
“Is there more work after the MMR? Of course there is,” says Lipnicki. “Regulation has played a part in rising proc fees as brokers are in more demand. It’s harder to place mortgages after the MMR so more borrowers are turning to brokers to search the whole-of-market and get them a deal.”
He adds: “I thought we were heading for an upfront fee-only market but the MMR has seen lenders raising proc fees.”
Higher proc fees also reflect the struggle by lenders to adapt to the post-MMR world within branches, with strict rules making it expensive and cumbersome to serve clients in-branch.
Lipnicki says borrowers are being turned off by long waits for appointments in-branch, where they may have two-hour meetings for a basic remortgage.
The biggest problem created by the MMR has been mortgage prisoners. These are borrowers who took out a mortgage when affordability rules were more relaxed and are now unable to get a deal in the new environment.
The FCA has called on lenders to use the transitional arrangements – which allow lenders to waive certain elements of the new rules to avoid borrowers being trapped in their current deal – but lenders say they fear retrospective action.
In its MMR cost-benefit analysis, published alongside the new rules last April, the regulator estimated that 2.5 per cent of borrowers would be unable to obtain a mortgage due to its affordability rules.
The FCA used the Joseph Rowntree estimate of consumer spending in the bottom 10 per cent of earners. However, most lenders use the average consumer spending figures from the Office for National Statistics when making affordability calculations, which are “significantly higher”.
Boulger says: “When the FCA calculated 2.5 per cent of borrowers would not qualify for a mortgage after the MMR, the figure was fatally flawed. The FCA was making a completely different assumption about how lenders calculate expenditure. That is a key reason why there are more mortgage prisoners than is generally recognised.”
John Charcol estimates that up to 40 per cent of mortgage borrowers are prisoners based on standard lender calculations rather than the FCA figures.
“There are various reasons such as affordability, borrowers with self-cert mortgages or adverse credit,” says Boulger. “Affordability is certainly a bigger factor than the FCA has estimated.”
From mortgage prisoners to the surge in broker deals, the MMR has rocked the mortgage market in a number of unexpected ways, both positive and negative, in its first 12 months, although its long-term effects remain to be seen.
MMR is just a bump in the road
Bernard Clarke, CML
While the MMR may have had some effects on the market, it is difficult to isolate or measure them.
We have nine months of lending data since the introduction of the new rules and, over this period, gross advances increased by 9 per cent year-on-year. So whatever the effects of the MMR, they seem to have been relatively modest.
Nor, if we study the data immediately before and after 26 April last year, does it look as if the process of introducing the new rules caused any obvious short-term disruption of the market.
And although since last summer there has been a slowdown in mortgage lending, it is difficult to say exactly why this has happened. In many ways, the slowdown sits oddly against a backdrop of improvements – to the economy, employment and consumer confidence. It also contrasts with a pick-up in unsecured lending – another sign of improving consumer confidence, albeit much of it driven by car purchases.
The recent slowdown has also coincided with some of the lowest mortgage rates ever seen. This might be expected to boost activity, although low rates limit the incentive to remortgage and this could have affected lending volumes.
Lending for house purchase has also been subdued recently, but there are a number of factors behind this, aside from any effects of the MMR.
Some of the special forces that drove the London property market last year have begun to subside. In many other parts of the UK, there have been growing affordability pressures as house prices have increased faster than incomes. And we have also seen the introduction of macro-prudential measures that have reinforced prudent underwriting standards.
The market will be affected by uncertainty around the election, although there are signs of a modest pick-up in activity. Bank of England mortgage approvals nudged upwards in January – for the second month in a row.
The Royal Institution of Chartered Surveyors has reported signs of new-buyer interest stabilising after seven months of decline. And builders sound more optimistic, with the NHBC reporting an increase in housing starts. Overall, therefore, we see no reason to revise the CML forecast that lending will grow by around 7 per cent this year to £222bn.
Similarly, there is little that leads us to revise our earlier assessment of the impact of the MMR as little more than a bump in the road.
Of course, the new rules will have affected borrowing at the margins – as was clearly the intention. But it looks as if any process of market adjustment to the new rules has been steady and extended over a long period, with few signs of obvious disruption.