Leeds Building Society has changed the way it assesses how much to lend to customers by replacing income multiples with its new affordability calculator.
The argument between multiplier and affordability models is interesting and there isn’t a black and white answer. Income multipliers can work well if they are set at an appropriate level and the lender has ways to deal with customers who can’t be adequately assessed in that way. This includes borrowers on low incomes, or a large dependent family, or those who want a short capital and interest repayment term.
Additional criteria such as tiered multipliers can mitigate some risks but the family unit size is arguably the biggest risk in terms of affordability.
Affordability models, while lacking in total transparency take more of a real world view, provided the modelling behind it stands up to scrutiny.
Affordability models used by rivals in the noughties meant they tended to lend more than was acceptable under multipliers, but by including the word ’affordability’ into the name it looked responsible. But behind the scenes living expenses, stress testing and contingency margins were pared to the bone.
There is a danger that lenders can regulate volumes through adjustments to models but they should have good governance around such changes and the regulator will review the basis of the models in supervisory visits. So beware the lender that relaxes the model to court more business without sound rationale.
Multipliers have served some lenders well, but they are not always accurate. A well-reasoned affordability model should produce more robust decisions and with a good experienced underwriter in tow, even better ones.
Seeds of change for lenders and brokers have been planted
The news in last week’s Mortgage Strategy that a major lender is in advanced stages of revolutionising the way it pays proc fees potentially sparking a radical overhaul of intermediary remuneration is an interesting development.
But it stands the risk of consolidating an already heavily culled distribution arm, with smaller intermediaries being forced out of the market or into a larger business or network, because perhaps, part of the criteria will be volume of business submitted as well as quality.
The Financial Services Authority is squeezing the directly authorised side of our industry and I am sure it would like to see far fewer such firms, with more going through networks.
This could be the first signs of lenders supporting that view – after all, lenders that deal with fewer distribution channels will see a significant cost saving, so perhaps this move is more financially driven than quality based.
Regardless of all the rhetoric to the contrary that comes from some providers, brokers are only as important as the market dictates. With most lenders having to support a branch network and also struggling with funding, brokers are perhaps an unnecessary expense.
I recently read comments from industry leaders – whose careers were built off the back of intermediary distribution – raising questions about how valid this channel is in the current climate.
I have been waiting to see how our industry will evolve as a result of the last five years and perhaps we are beginning to see a glimmer of the direction it will be taking.
My concern is that we seem to be regressing rather than progressing, with regulator-led limitations pushing us backwards.
Perhaps we are starting to see lender-led moves that will further restrict consumer access to independent advice.
But if moves such as the one suggested in Mortgage Strategy’s article last week lead to a raising in standards of intermediaries and lenders practices then there are possibilities of significant benefits for providers and consumers.
If the quality of the business submitted improves as a result of such moves then that could mean providers will work more closely and transparently with brokers.
Who knows, that could lead to the point of mutual respect and partnership that creates true collaboration and thus innovation.
Such steps could even work to the satisfaction of the regulator, allowing a reduction in the cost of supervision and a regime that will allow innovation without the current encumbrances imposed on it. The seeds of change appear to finally have been sown.
Proc fee revolution should encourage a focus on quality
With regard to the story last week on planned changes by one major lender to proc fee levels it is simply too early to judge the impact without more information.
I am surprised some of the larger distributors appear to have effectively given the green light by welcoming such a move at this stage – unless they have been fully consulted and already done an impact assessment on the changes.
This is not only about the value distributors and networks add to lenders in terms of management information but also relating to product segmentation or firm profiling and market sectors.
There are many other questions and potential issues. What criteria is to be used and over what period will be the assessment be made? How regularly will fees be reviewed and will they move up and down?
Will there be additional proc fee bandings to reflect the changes? Will higher proc fees be available to larger individual firms that can demonstrate meeting quality measures as well as deliver volume?
What about firms that are long-standing supporters and have a strategy for growth and strong compliance and governance?
If proc fees are to be assessed against quality and not volume at the individual firm level, what will the impact be on the income of distributors and networks?
If volume assessment is no longer taken into account at the individual firms level then I assume aggregation cannot be used by distributors or networks any more.
This means the effective death of volume aggregation at a stroke – a fundamental change for all distributors and networks.
But can we really say volume no longer counts? A good percentage of firms charge a broker fee and this is likely to increase over time.
For distributors and networks that derive some if not all their income from top-slicing proc fees, they face a strong test of having to adapt their business models and value proposition to support firms through change over the next few years and having to address the challenge of sustainability from reduced incomes.
The pressure on proc fees in the short to medium term will undoubtedly be downward. Let us hope that the effect of any change made is at the least neutral on proc fees and that it is designed to encourage a focus on quality.
People who will be most hit by loss of advice is borrowers
David Sellenby’s letter in the April 9 issue argues that only brokers feel advice is vital.
While this can be true, the value of a broker is seldom about selecting the cheapest product from a sourcing system. All brokers will attest that sourcing even simple cases can be far more complicated and time-consuming than years ago and often up to the 10 cheapest products are not available when fully investigated.
Online comparison sites will ignore the finer details such as underwriting criteria, buy-to-let in the background, geographical limits of lenders and speed of processing, which can affect more than half of borrowers.
All the following examples are cases I have sourced recently and all were clients with no adverse credit and the income multiples were relatively modest:
I took over a case from a bank mortgage arranger that had been ongoing for six months and completed the whole purchase in less than three weeks.
Correctly sourced a mortgage for a client’s daughter at university as a second home instead of a buy-to-let saving them thousands of pounds.
Assisted a client on a tier one visa who had been refused initially by the lender direct but accepted once I had discussed the case.
Completed a mortgage within the 20-day deadline for a client who called me on his way home from the auction a few days before the Christmas break.
Negotiated with a lender to include 100% of a client’s income sources to obtain a rate 1% lower than would otherwise have been offered.
A broker can also make a difference when things go wrong. They often see cases that are easily sourced and are perhaps ideal for direct to lender situation, but come close to falling through at the last minute for some obscure technical reason.
Over the years, I have secured purchases for a number of clients where the estate agent acting for the vendor and solicitor acting jointly for the lender, were unable or unwilling to assist.
All brokers could no doubt provide similar lists of how their involvement in the process has worked in their clients’ best interests and secured them a home.
Of course we get paid, but we are not charities and all our clients choose to use us. The loss of advice would mean a change of job for me, but I believe it is consumers who will lose the most.
The Retail Distribution Review comes in shortly and it is, in my view, the poorest and most vulnerable consumers who will be ostracised from receiving financial advice, but we will only know once the rules are implemented.
Temple Capital Finance
Niche lending role is important but there’s a fly in the ointment
Christian Faes, managing director of Montello Bridging Finance, made a good point with regard to the importance of non-bank lenders in his column in the April 9 issue.
As he says, there is a huge gap to be filled and if these new lenders are not encouraged, the funding gap will inevitably remain for longer and potentially have dire consequences for the recovery of the market.
There is no doubt the market recognises the role of specialist niche lenders such as Montello and indeed my own company, Boutique Capital.
Unfortunately, we are unlikely to see much change in the risk avoidance tactics of the mainstream lenders, which will continue to significantly depress archetypal lending volumes for many years to come.