What happened to the market in 2005

The start of the year saw dismal volumes in the mortgage and insurance markets as they felt the heat of regulation but they soon perked up and saw business grow, says Richard Griffiths

Following the advent of FSA regulation, the mortgage and insurance markets took some time to settle down, with pretty dismal business volumes in the early part of the year.

Since then, however, everyone seems to have achieved growing business, which carried through into November. As John Rice, managing director of the Regulatory Alliance of Mortgage Packagers is quick to point out, his members have achieved record business levels month on month. It makes you wonder if their growth will ever stop.

Mortgage packagers have been the subject of much speculation since the beginning of regulation. A recent leader column in one of the pinks began with the words “Packagers have long been the butt of jokes in the mortgage industry”. The column ended by saying: “It is widely accepted that we live in a fast changing world, and where nothing is certain packagers should learn how to adapt”.

Talking of the challenges facing packagers, David Wylie, managing director of c2 financial, recently wrote an article entitled “Who will crash and burn?”. Wylie commented on big borrowing and nervousness among debt-laden packagers.

There are many other signs of unrest among the packager community, with some sizeable concerns such as ICMG and Advantage selling out to Bear Stearns and Morgan Stanley respectively. Some small packagers have huddled together for comfort under the recently formed Freehold banner, while the longest established co-operative of mortgage packagers, the Professional Mortgage Packagers Alliance, is rumoured to be falling apart at the seams.

The impression is one of packagers, large and small, labouring under the illusion that they have survived Financial Services Authority regulation, contrary to earlier predictions that they would all be out of business by now.

The lender community has exhibited a healthy attitude to competitive times, with a relentless stream of innovative products. New lenders such as The Money Partners, London Mortgage Company and Rooftop Mortgages seem to have prospered in 2005, each achieving around 1bn of new lending over the 12-month period. I am less familiar with the likes of Victoria Mortgages and Infinity Mortgages, while Unity Home Loans is a relative newcomer and may yet feel the negative impact of unrest among PMPA members.

The independent financial advisory market seems to be going through some major structural changes. Both Thinc Destini and Positive Solutions have gone from strength to strength, the latter now a wholly-owned subsidiary of Aegon. In contrast, long-established IFA firms such as Berkeley Berry Birch are fighting for their lives under the threat of closure by the FSA. Berkeley Berry Birch has a huge capital adequacy deficit of around 12m. Millfield/Inter Alliance seems to be heading in the same direction.

The new mortgage networks have also experienced their own trauma during 2005. Having started the year with 35 networks, there are now 25 left standing, some not too steady on their feet. Quite a few have gone out of business, while others have merged.

The first mutterings about Home Information Packs started to emerge in the summer and the noise has since built up to a climax. Much of it is ill-judged comment from people who display a superficial knowledge of the subject and how it will operate in practice.

Crystal ball gazing for 2006The Council of Mortgage Lenders is forecasting that gross mortgage volumes are likely to be less buoyant in 2006, with gross lending figures dipping 5% or so. This still leaves ample opportunity for smarter operators to increase their market share at the expense of competitors.

  • RAMP will announce relentless growth throughout 2006. Otherwise, packagers are likely to see further consolidation in their market, as the smaller ones struggle for distribution and the larger ones, who rely on business through being on the panels of mortgage networks, see their margins eroded through onerous profit-share arrangements.
  • Following on from David Wylie’s comments, I agree with his prediction that some packagers will crash and burn during the year. Unsuspecting brokers may lose their pipeline proc fees.
  • Mortgage lenders will have their own challenges. Peter Williams, deputy director-general of the CML, says the Basle II capital requirements and HIPs could have a bigger impact than regulation on the market’s structure.
  • There are a reputed 20 or so new lenders wanting to make an appearance in 2006. In reality we may see about six, including the reappearance of high-profile personalities such as Michael Bolton and Bill Dudgeon.
  • The IFA community may see high-profile casualties as and when insurance companies stop bailing out the basket cases. The FSA’s patience may become exhausted with the capital adequacy deficits shown by some larger IFA firms, and close them down as quickly as the legal process will allow.
  • The FSA will provide a rude awakening to firms paying lip-service to its rules and regulations. Smaller broker firms that are directly regulated will have to submit their first regulatory returns in April/early May. This may prove a challenge and many are likely to fail to submit the return. This will leave the FSA with a major problem.
  • As for mortgage networks, you can expect the 25 existing today to number 15 or less by this time next year. I have my own views on the likely survivors, but it would be less than charitable for me to name any names.
  • HIPs providers are likely to crawl out of the woodwork in increasing numbers, reminiscent of the explosion of mortgage networks prior to FSA regulation. Remember the 70 or so networks that reputedly registered with the FSA?
  • There are many parallels between the emergence of the mortgage networks in 2003/04 and what we are likely to see in 2006 with would-be HIP providers. Hopefully, the quality of market commentary will improve, and brokers and lenders will have a clearer sight of its impact on them.
  • Finally, I predict that for the third and final year in succession, Christmas and Boxing Day bank holidays will fall on a Monday and Tuesday, and New Year 2007 will fall on a Monday. I’ve got to get something right after all.