Most, I am sure, will say that they already have good relationships with their brokers. They are probably right, but only to a point. I’m pretty sure these are relationships based on front end sales, fostered by target-driven BDMs.
But now we live in changed times. Selling mortgages is becoming a distant memory and arrears are rising at an alarming rate. This is a time for lenders to take stock, look at what they have on their books and ensure that when confidence returns their focus is on asset quality rather than simply making the numbers.
At the latest Mortgage Business Expo Lesley Titcomb, director of small firms at the Financial Services Authority, reminded an audience largely made up of brokers of some of the issues facing their sector.
I believe there were also some key lessons for lenders – after all, where have lenders historically got their business from?
Titcomb identified five key risk areas – inadequate standards of competence and professionalism, unsuitable advice, inadequate finance resources and business model sustainability, inadequate management oversight and inadequate systems and controls in place to detect mortgage fraud. These were identified as a result of work carried out in the intermediary sector. It is worth pointing out that lenders hold mortgages placed by these intermediaries.
Titcomb also raised the issue of what she described as phoenix firms – organisations that go under only for the directors to miraculously reappear at the helm of other firms. There were even examples of firms that take this step when enforcement action looms or when the cost of, say, the FSA’s re-quired skills person reports becomes too onerous. This is nothing new. It first happened on a not insignificant scale when investment firms had to grapple with a pensions review. They found themselves with horrendous liabilities – firms concerned with comparatively modest endowment complaints don’t know the half of it. In that case the FSA came down on phoenix firms hard and it is now clear that in the mortgage sector it will do the same.
But what has all this got to do with lenders? Well, I strongly urge you to look at your portfolio in terms of where the business came from. For example, it should be a matter of routine to look at cases which came from firms that have been through enforcement, particularly those in arrears. Someone, somewhere is sitting on the cases that caused them to go into enforcement in the first place. If it is you, it should inform any arrears or recovery actions you take.
So, there are a number of questions you ought to be asking about your portfolio, including:
Certainly, in arrears cases you ought to be looking at who the introducer was and whether this fact is significant.
A careful analysis of the origin of problem cases will lead on to a number of questions and action points for prudent lenders. For example – is there something about the way you process or underwrite cases which leads to a disproportionate number of problem cases coming to you? Do you need to alter your systems or underwriting criteria more than you have already?
It may transpire that there are brokers or packagers with whom you decide not to do business in the future. It will be hard to justify continuing relationships with introducers whose cases went bad.
The difference between the problems of today and those of the late 1980s and early 1990s is that we now have the FSA. The regulator will expect you to use the information you have in your possession to inform your approach going forward. It will not be impressed if you do not. And regrettably, it’s not as if you haven’t got the time on your hands.
Philip Tebbatt is principal of niche financial services law firm Slater Rhodes and can be contacted at firstname.lastname@example.org