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Will the lenders come out to play?

Even if lenders hand over their affordability calculation secrets to sourcing systems – and they will be unwilling – integrating the data will be problematic, says Richard Griffiths

My column in Mortgage Strategy on October 31 looked at the increasing and irreversible use by lenders of affordability calculators to arrive at the loan amounts they are prepared to offer applicants.

The article finished with a question – will lenders co-operate with the sourcing systems and provide them with the magic formulae? This is a quite fundamental question.

If lenders don’t co-operate, mortgage brokers will be headed back to the Dark Ages – the days before mortgage sourcing systems when brokers generally worked with five or six lenders whose criteria they knew off the top of their heads.

To illustrate this point, imagine a time in the not too distant future when all lenders will be using their own affordability calculators. The use of income multipliers will have become obsolete.

Today’s sourcing systems, which were built around income multipliers, will become quite useless. If they can’t calculate the correct loan amount then it follows, as night follows day, that they can’t calculate the correct monthly mortgage payments, true cost over a defined period of time, fees expressed as a percentage of the loan amount, early repayment charges and quite a few other things.

Even if you have concerns about the accuracy of Key Facts Illustrations produced by the sourcing systems of today, you might end up looking back on this immediate post-regulatory period with fond nostalgia – the good old days of income multipliers and accurate KFIs.

You will find yourself in an era where, to source the best mortgage for your client, you will have to log in to the websites of various lenders, one at a time, input your client details each time and print off copious KFIs so that you fully understand the costs of each mortgage before you can recommend a single product or short selection of products to your client.

But brokers aren’t going to do this. They simply don’t have the time to trawl around the websites of more than 100 mortgage lenders operating in the market. The measly proc fees paid by most lenders will not compensate for their time, and there is a limit to the size of broker fees that will be acceptable to the clients.

The most probable outcome is that brokers will simply stick with a few of their favourite lenders. If you are a first-time buyer, it’s a Halifax mortgage. A sub-prime buyer, Kensington Mortgage Company. A buy-to-let, Paragon Mortgages.

It would literally mean a move back to the era before mortgage sourcing systems became widely used. It will be akin to going back to the quill pen, the horse and carriage, an evening’s entertainment of reading books by candlelight.

Treating Customers Fairly? Forget it pal, its hard work and poorly paid. Brokers cannot be expected to work as a charity.

If the FSA has concerns on this issue, and it should do, point it in the direction of the lenders who contributed to the root cause of this diabolical situation by not supplying their affordability calculators to the sourcing systems in the first place.

Some will argue that this prediction of gloom is just a figment of my imagination – looking at the glass as half empty rather than half full. Instead, they may say, the future will be all sunshine and happiness. Lenders will happily co-operate with the sourcing systems and hand over their affordability calculators so that the sourcing systems can continue to search and select mortgages from the whole of the market, produce the correct loan amounts and the corresponding accurate KFIs.

I don’t think so. Anybody who thinks this is going to happen is, in my opinion, being extraordinarily na.

Lenders are very protective about their affordability calculators. They are an integral part of the risk assessment of applicants and ultimately the expected profitability of their mortgage lending.

That is not something lenders will wish to share with competitors who may be using inferior affordability calculations.

Lenders, rightly or wrongly, feel that handing over their affordability calculators to the sourcing systems would be like placing them in the public domain. The software calculations will end up on the desktops of thousands of brokers. It will then be easy for lenders to get hold of copies of the software and drill down into the workings of their competitors’ affordability calculators.

Even if some lenders were to contemplate handing over their affordability calculators as black-box software engines, it would put a severe strain on the software development resources of the sourcing systems to integrate the calculators. Some of the calculators might have been designed for use on mainframe computers. It could involve major re-engineering to get them to function correctly on a desktop PC.

There are a host of technical issues to consider, not least of which is the connections to Experian or Equifax for credit checks.

Sourcing system will find it difficult if not impossible to gain access to the level of detail available to the lender community who have an exchange of client data with the credit search agencies.

Is there a solution? Yes, as I shall explain next week in completing this trilogy of articles looking at the medium-term technical challenges facing the sourcing systems.

On England victories over AustraliaBob the Builder is going through a house he has just built with the woman who has bought it.

She is telling him what colour to paint each room. They go into the first room and she says, “I want this room to be painted a light blue.”

After which, Bob goes to the front door and yells, “GREEN SIDE UP!”

When he goes back into the house she tells him that the next room is to be painted bright red.

Again, Bob goes to the front door and yells, “GREEN SIDE UP!”

When he goes back into the house she says that the next room is to be painted tan.

Bob goes back to the front door and yells, “GREEN SIDE UP!”

When he comes back this time, the lady simply has to ask him about this. “I keep telling you colours,” she says, “then you keep going to the door and shouting ‘green side up’. What’s going on?” And Bob replies, “Don’t worry about that. I’ve got a couple of Aussies out front laying turf.”

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