If there’s one thing that gets mortgage brokers’ blood boiling it’s dual pricing in favour of direct deals. Once upon a time dual pricing existed to benefit brokers but in this more difficult time it is working against them.
Comments on Mortgage Strategy Online show just how angry brokers feel when a lender slashes its fees or offers better rates direct. So when Halifax for Intermediaries cut the fees on its direct-only deals by 50% while simultaneously launching its online broker system there was discontent in the ranks, to say the least.
So naturally the first question to Peter Curran, head of intermediaries at Lloyds Banking Group, has to be about dual pricing and the unveiling of the online system.
“The two are separate,” he says. “It was just a coincidence that the launch came along at the same time. It’s always been the case that we’ve offered a variety of products in our direct and intermediary ranges and this is likely to continue.
“If you look back over the past few years our business via brokers has ranged between 55% and 65% whereas our direct business has been between 35% and 45%. We believe this trend will continue – that is our intention.
“Brokers remain important to us and they will play a big part in our business going forward,” he adds.
Curran says it took a year to design its online broker system and the cost was considerable, but he believes it’s now the best in the market.
Halifax engaged with intermediaries across the country and involved them from the design phase right through to implementation.
Our business via brokers ranges between 55% and 65% and we believe this trend will continue – that is our intention
“We wanted to improve what was already a popular system,” says Curran. “We took some of the best bits of the old Halifax system along with the best bits of the existing BM Solutions system and came up with a new Halifax system we believe is the best in the market.”
He adds that the main benefit is that it gives immediate decisions in principle and for clients who are found ineligible provides reasons why and suggests alternatives. It also offers multi-user access which allows all members of a firm access to cases.
And with the publication of the regulator’s recent Mortgage Market Review discussion paper Curran believes the system will help deal with potential regulatory costs. In fact, Lloyds group is becoming something of a teacher’s pet by pre-empting any regulatory changes the Financial Services Authority may implement. It is trying to adapt to a variety of issues in the new framework before they are officially brought in.
But Curran refuses to be drawn on what he thinks will be implemented from the MMR paper.
“I think we’re at the starting point,” he says. “Proposals have been put forward and it’s now up to lenders to come back with a sensible response to them. This is a discussion paper and there will be more, with the Council of Mortgage Lenders involved at every stage. The next steps will be decided in the coming months.”
Curran insists Lloyds group is prepared for anything the MMR may throw up but says extra costs are inevitable.
The potential end of fast-track – which accounted for 43% of the market in Q1 2010 – is causing concern in the industry.
The distinction between self-cert and fast-track appears to be lost on the FSA. Fast-track is being treated as tainted self-cert and the FSA seems determined to make a stand. This is despite its admission that the arrears figures for fast-track are no greater than for other mortgages.
But lenders don’t seem to be throwing in the towel just yet and Curran’s position is similar to many in that he is not convinced the discussion paper will be implemented in its current form.
“I think another look at fast-track would be the solution favoured by lenders and intermediaries, and consumers would benefit from this too,” he adds. “It’s important to remember what fast-track means. We need to ask whether a ban would be sensible and whether it would improve the mortgage experience for the majority of home buyers. It would be good to see some sort of sensible outcome from the MMR.”
The expense of verifying so many incomes could affect the cost of servicing applications. Most big lenders currently have around two service centres for processing mortgages but Curran says this would have to change if a ban on fast-track was introduced.
“If there’s no more fast-track it will impact our resources,” he says. “How many people or service centres would be affected it’s difficult to say at the moment but we’d have to rethink our working practices to do the amount of income verification that might be stipulated.
“We are prepared for whatever changes are forced on us and our new online system will help as it will give instant DIPs and paperwork will also be more clear. The process will be made as simple as possible.”
Next year will be slow but in 2012 the market will get up to around £200bn and a lot of that growth will come via intermediaries
Of course, it’s not only fast-track that was tackled in the MMR discussion paper but interest-only mortgages too. The FSA made a beeline for them to ensure they are not being obtained by home owners with no means of repayment, simply waiting for house prices to go up before selling on.
Lloyds group became the first lender to restrict interest-only mortgages for new applicants to less than £500,000. Since then many others such as Coventry Building Society and Northern Rock have restricted interest-only to lower LTVs or set a maximum loan amount on this type of mortgage. Coventry went so far as to say that it was following other lenders to keep in step with the market.
Shortly before the MMR came out Lesley Titcomb, former director of small firms at the FSA, told the CML that the irresponsible lending practices of interest-only had caused problems and hinted that it was good that some lenders had decided to scrap it. But Curran claims Lloyds group made a commercial decision on interest-only and was not acting under pressure from the FSA.
“We want to be a responsible lender and want our borrowers to be able to repay their mortgages,” he says. “But in the right circumstances and for the right reasons, interest-only definitely has a place. For clients with the right repayment plans it is appropriate but in the past it has been used by individuals to buy bigger homes with the sole aim of selling these and not paying a big mortgage. We don’t support that kind of strategy.”
The group is making a name for itself for being ahead of the curve, a perception cemented after it ditched the much-criticised payment protection insurance. Lloyds group claims incoming regulation will increase costs on sales to such an extent that the product will become uneconomic. And Curran believes it’s not part of the lender’s core relationship with its customers.
“We have a core relationship strategy with our customers and decided that certain products would be central for us,” he explains. “After a lot of discussion and soul searching we decided PPI wasn’t a key proposition for our customer base. So instead of having it for some and not others we decided we would no longer sell it.”
Claims management firms have been circling PPI sales for years, with reports of consumers finding it difficult to get payouts. Which? has praised Lloyds group for abandoning the product and questioned its benefit to consumers. Future regulation could make PPI not worth the trouble so Lloyds group has taken the initiative by stopping selling it now.
And the lender is trying to be proactive on fraud too, which it admits was one of the factors in its recent decision to cut its solicitor panel.
But Curran refuses to be drawn on whether the Law Society should be doing more to police its members, saying the reduction in its panel was mostly down to natural waste.
“We had thousands of solicitors on our panel and decided it would be useful to clean it up,” he says. “We removed those we hadn’t used for a year or so along with those who rarely used us. But there are still plenty of firms on the panel.
“Fraud is an important issue and something we are always trying to tackle. But you’d have to ask the Law Society about whether it polices its members sufficiently – it’s not a subject I’d like to be drawn on.”
Curran says it’s important for lenders to work with the Law Society to discuss the challenges, potential problems and various types of fraud.
“We have a close working relationship with the Law Society and I’m sure that will lead to some significant improvements in the next few years,” he says.
As head of intermediaries Curran must be concerned about the future of mortgage brokers. With an FSA-commissioned report by economic consultancy Oxera suggesting some 60% of them could disappear following the implementation of the MMR and players such as Moneysupermarket.com suggesting brokers limit choice, there’s a lot of negativity in the industry. But Curran is optimistic and believes brokers will lead growth in the coming years.
“I believe there is a role for brokers in the market,” he says. “We are at a point in the cycle where the mortgage market is about £140bn and not showing much signs of growth in 2010. Next year will be slow too, but when we come to 2012 and 2013 and the market gets to around £200bn or more a lot of that growth will come through intermediaries.”
Curran insists that the appeal of brokers is unchanged and direct deals and comparison websites can never replace them.
“Consumers like using brokers for a variety of reasons such as advice, speed, choice and convenience,” he says. “All these things point towards a future for brokers. They’ve been around for some time and I don’t see that changing.
“The challenge for us is to live in an environment in which we work together, where lenders have their own channels but also their intermediary channels to work with. I don’t think the end of brokers is a realistic prospect and they will see growth again.”
Curran adds that remortgages will be the engine of recovery. With a low Bank of England base rate many home owners are comfortable sitting on low SVR mortgages and are unwilling to move. And many more are unable to move due to the effects of the recession on their incomes and jobs. But once the economy recovers and the base rate starts to rise Curran believes there will be some movement in the market.
“There are plenty of reasons why borrowers are not remortgaging now but once that changes it will trigger activity and growth in the remortgage market two or three years down the line,” he says. “This will provide brokers with some fantastic opportunities and it’s up to them to make the most of these.”
In terms of funding the intermediary boss is positive it will improve, but not until 2012. He admits the market has been flatter than many hoped in the past 18 months and that funding pressures will produce a static market for another couple of years but when wholesale funding loosens and the base rate rises brokers could find themselves working in a £225bn industry.
“Once rates rise, the Special Liquidity Scheme is repaid and wholesale funding markets start to open we will see some activity,” he says. “If you take the view that consumers probably change their mortgage every five to seven years a sensible mortgage market is around, say, £225bn. If you consider how that market growth will be managed you’ll see that a lot of it will be done through the intermediary channel.”
In terms of risk appetite and LTVs in the next few years Curran is as unsure as anyone else, but one thing he does know is that lenders are not hungry for risk right now.
“How much we can go up the risk ramp is an interesting question,” he says. “There are more 90% LTV mortgages now than a year ago but how far we go remains to be seen. I guess we’re not going to see 125% LTV deals but there will be more 90% LTV and even 95% LTV deals for the right buyers. But there’s not likely to be a big appetite for risk for the forseeable future.”
Of course, risk in the mortgage market is what started the financial crisis and if first-time buyers are to return there must be more deals over 80% LTV. But the mortgage industry is going through many changes following the most turbulent years in its history. After the storm comes the clean-up and Lloyds group appears to be cleaning up before the FSA asks it to do so.
By being a standard bearer for what lenders should be doing the group is not only trying to stay on the right side of the regulator but also preparing for the inevitable costs of further regulation.
And while it may not be an intermediary-only lender it’s clear Lloyds group understands that the appeal of brokers means they will feature in the future of the mortgage industry. So direct deals will always have their place and, when commercially viable, they will be cheaper but as the lender gets to grips with regulatory change and ponders recovery it is finding that its future and the future of brokers are inseparable.