But with the credit crunch starting to bite hard on the networks and distributors left in the marketplace, it’s a word increasingly on the lips of not just appointed representatives wondering whether their networks will last, but lenders as well. Who will go the distance?
Since Mortgage Day pundits have endlessly predicted every year that we were about to see a wave of consolidation that would finally bring the number of networks to just under 10 firms. But just like Capital Economics’ predictions of a major market crash until Northern Rock was nationalised, it never came true.
However, the list of networks could shorten in 2009 and 2010 as the credit crunch gets into full swing. With lenders privately and publicly drawing up lists of preferred distributors to do business with, this could be the writing on the wall for smaller networks. The dawn of a super-elite of five to 10 key distributors in the mortgage market could be nigh and towards the top of that list would have to be Legal & General.
Its share price may have blipped recently, but on the housing side it still continues to be bullish about the future.
“The company has been around for 160 years and we will be around for another 160,” says Stephen Smith, director of L&G’s housing division. “Our presence in this market can be taken as a given.”
L&G was formed by John Adams and five other lawyers in June 1836. Originally called the Legal & General Life Assurance Society, the society was restricted to those in the legal profession. The name was then changed to L&G Life Assurance Society to reflect that policies were available to the public but with share ownership restricted to those in the legal profession.
Over the years it has had a diverse track history in the financial services industry, branching out into everything from insurance to mortgage lending itself. But close to two centuries of history is unfortunately no insulation to current market woes.
Smith heads L&G’s estate agency, surveying and mortgage distribution divisions, all of which are arguably facing their biggest threat in over 50 years.
“It’s not just modelled on mortgage distribution or indeed mortgage distribution with insurance on the back of it, it’s an involvement in the housing market in a number of areas,” he says.
The estate agency business operates on a franchise model and has about 90 branches. The franchise network is called Xperience but each of the branches trades under local brand names. So up north it’s Whitegates, in the Thames Valley area it goes by the brand name Parkers and in London it’s Ellis & Co.
“We’ve got a surveying business and we’re probably the third or fourth biggest panel manager of surveys and distributor of surveys, so lender valuation work coming in is passed to our business partners,” he says.
“And we’ve got our mortgage club and mortgage network as part of that so I am responsible for three somewhat challenged businesses at the moment, which makes for an interesting time,” he adds.
Along with its AR network L&G Partnership Services, it also offers products to directly authorised brokers via L&G Mortgage Club.
Smith is initially tight-lipped about how much both businesses distributed in 2008 as the figure has yet to be officially released.
For 2007 both sides combined processed around £23.5bn, with £15bn via the AR network and the remaining £8bn on the DA side. 2007 was a record year for the mortgage industry but with it starting to crumble towards the end of the 2007, it was unlikely that the 2008 figures would equal that.
But when rival networks’ estimates for lending over 2008 are mentioned he does give a vague indication.
“I don’t think we came in at £20bn,” he says. “I think it will probably be less that that but we’re down less than the market because we were growing on the DA side. However, there isn’t a requirement to publish a figure – we may do a press release later on.”
But Smith is confident that among the network big boys it continues to punch its weight. And while it may languish in 14th place on the latest quarterly network round-up based on Financial Services Authority statistics, Smith contends the firm has got it where it counts.
“It’s always been a bone of contention when a firm says it is the biggest network,” he says. “It may be the biggest network in terms of AR numbers but in terms of mortgage placement we would contend that we are probably the biggest.”
Another major factor to take into account is that following M-Day L&G made a conscious decision to downsize the number of ARs it had.
“In the run-up to mortgage regulation, L&G’s AR model, which was always a model for insurance and investment sales, had to evolve,” says Smith. “We decided to encourage some of the smaller players to amalgamate together or amalgamate into some of our bigger firms.”
He says there are at least half a dozen big firms like Mortgage Talk within the network. And he says the aim is to give ARs relative autonomy in how they run their businesses. Mortgage Talk alone has around 70 to 100 sellers compared with small firms in some of the mortgage networks at the top of the FSA’s quarterly figures .
“So our AR numbers are low but our seller numbers, which nobody publishes, is quite high, as is the volume of mortgages placed,” he says.
What Smith is less confident about is where the market is heading.
“The industry has been caught short by the pessimism of the Council of Mortgage Lenders’ projections for 2009,” he says. “I was at a conference in early December where two of the biggest lenders were predicting figures of between £160bn and £180bn. Then in mid-December the CML comes up with a figure of £145bn.”
And there’s more bad news. With Bank of Ireland and its subsidiary Bristol & West pulling out of the market at the beginning of January, lenders have warned that this could have wiped out a further £5bn to £6bn.
“So we could be looking at £140bn and that is chilling as far as the industry is concerned,” he adds.
With the numbers of mortgages taken out bottoming, the net result has been to hit brokerages in the wallet and the latest figures from the Financial Services Authority show that around 769 mortgage broking firms have already thrown in the towel, and more will no doubt follow.
Smith says that L&G has already seen this effect.
“Our seller numbers are lower on the previous year. Productivity has probably gone in the opposite direction because those who remain are working harder and producing more business.
“The industry is going through an arguably overdue phase of readjustment of seller numbers to the volume of mortgage business capable of being placed,” he says.
He suspects the CML’s prediction for lending in 2009 was deliberately pessimistic as part of a political strategy to alert the government to how bad things could get if it failed to act.
The measures announced by the government on January 19 to kick-start lending in the UK is hope-fully a sign that the government has listened to this apocalyptic warning from the CML, he says.
He hopes we will see a partial or complete take-up of the suggestions made by the now infamous Sir James Crosby, with the Bank of England allowed to purchase assets and the government then providing guaran-tees for top quality gold standard mortgage backed securities.
“All those things should mean that £145bn figure goes upwards,” he says. “£140bn to £145bn is as pessimistic as we need to be. I’d like to think that the measures that came in on January 19 and whatever else comes up over the course of the year will produce a bigger figure than that.”
The CML’s latest figures show an 8% fall in gross mortgage lending last month, down from £13.5bn in December to £12.4bn in January. If you multiply that by 12 over the year it comes out at £149bn and the CML adds that it is “unrealistic to expect a meaningful revival in lending in coming months”.
Lenders have had to deal with the fact that with the securitisation market shut, mortgages are an illiquid asset and that has put a tremendous constraint on new lending. As has been well documented in Mortgage Strategy, Woolwich has been one of the first lenders to take the bold step of limiting the number of distributors it does business with. It’s also offering tranches of money to each of those businesses to ensure that new lending is tightly controlled.
Smith estimates there are about half a dozen active lenders left.
“Each one of those is going to make decisions about who it wants to lend through,” he says. “We would think that when lenders are making those decisions they will look at the cost-effectiveness of distribution. They will have to look at the quality of distribution that’s produced and whether particular distributors shift volume but actually give bad arrears or bad application to completion ratios.
“There is also the issue of longevity. If I was lender I’d be thinking to myself am I going to put a load of money out through brokerages, networks or clubs that may not be there to pay the fees six or 12 months down the line? We think we stand highly on all these issues.”
Large brokerages such as John Charcol have also tied with L&G on protection and Smith is a strong advocate that diver-sification, cross-selling insurance products on the back of a mortgage, is the way to survival in the broker market.
In part that’s a reflection of L&G’s background. Its mortgage distribution model grew out of the insurance sales industry and Smith says that 10 to 15 years ago the majority of the firms it now has as ARs grew out of the insurance market.
“You’d argue now the wheel has turned a bit and they’re mortgage people who do life insurance but they haven’t lost the skill set,” he says.
“We’ve always had businesses that do a significant volume of life insurance and other insurance sales alongside mortgages rather than just specialising in mortgages. Hopefully it will be those firms that will survive.”
He gives the example of two firms that L&G is in partnership with and their differing strategies to protection during the market downturn.
The first firm has actively contacted its client back book to see whether their circumstances have changed and there is the potential need to re-broke their protection cover.
It has seen mortgage volumes drop off by 35% in 2008 but its protection and insurance sales are up by about 20%, he says.
“It has concentrated on getting the maximum out of every mortgage opportunity and has gone to its existing client bank and reviewed everyone’s protection needs,” he says. “If you sold cover four or five years ago people’s circumstances may have changed. They may have got married, divorced, had children, moved house or got promoted and their protection needs may have changed.
“There is a rich seam to be mined in terms of reviewing people’s protection needs. And if you’ve done a full fact-find, which if you’ve had the discipline of the life insurance business, you would have done anyway, you know more about your customers than the lender as there is more on a fact-find than on mortgage application forms. So you are in a good position to sell products for different or changed protection needs.”
By contrast, the other firm has failed to get to grips with protection. So while it’s also seen its mortgage business collapse by about 35%, its life insurance sales have plummeted by 36%.
“Will that make it through the tough times?” he asks. “I don’t know.”
But L&G is keen to assess weaknesses in firms’ business models and help them to help themselves. L&G has a business development team that will go to firms, assess what business they are doing and where they could beef things up.
“That’s where the L&G relationship, particularly on the network side, is adding value back into those businesses trying to help them through,” he says.
Another major area where the L&G relationship is paying dividends for many firms is on the payment side. At a time when many of the smaller networks are struggling to pay their ARs, Smith says that has never been a problem at L&G.
In fact, he says there are a number of DA brokers who place all their business via L&G Mortgage Club. So for those firms, L&G is paid by lenders and ensures individual brokers get their money.
“It’s probably a hostage to fortune but I defy you to find somebody we’ve paid late – we just don’t,” he says. “There are weekly payment runs and the money churns through. There is no facility to hold up payments, it’s set up to pay.”
He says L&G’s strategy is always to put itself in the payment loop.
“We view that as a strength because we are able to pay if people need it on exchange of contracts rather than on completion,” he says. “We fund that ourselves, but if a broker knows a case has gone to completion either on a remortgage or exchange of contracts on a purchase he can claim the money from us, we will pay it out and then settle with the lender when the completion happens.
“That gives them a month or so cash flow advantage which in strained circumstances can be an advantage.”
Just before the end of 2008 Smith published a report on the state of the mortgage market as it developed in 2008 and where L&G saw the market progressing in 2009. Ominously titled A long dark tunnel – but is there a glimmer of light?, the report doesn’t spare any punches in summing up the woes of the market. But it’s also positive about the future and brokers’ place within it.
“A strong, diversified intermediary market is essential for the health of the mortgage market, and lenders do understand this, even if they sometimes don’t seem to show it,” Smith says.
He also lists a number of emerging trends in the market and one of those is consolidation. If the rumours in the market are to be believed, there are a lot of well-known and high profile networks now up for sale.
Is L&G looking to be a consolidator? Smith says there are opportunities, but by the same token it’s not sitting on a pile of money to go out and buy mortgage distribution.
“I think anyone buying mortgage distribution at the moment would be courageous because you don’t know where the market is going to be,” he says. “You also don’t know what you’d be buying in terms of risk.
“But that isn’t to say that if opportunities are presented to us or if we become aware of them that we won’t look at them, because we might.”
He also points out that there is more than one way to skin that particular cat. Rather than taking firms over, it has completed partnership deals whereby firms submit their mortgage business via the club and may be tied to L&G for life and general insurance, but they still run their businesses as directly authorised firms.
“That means when I talk to lenders I’ve got more billions on my side,” he says, which is vital when lenders are becoming increasingly choosy about who they do business with.
“We sit in a strong place but we don’t have an aspiration to buy up lots of firms,” he says. “I’d prefer to work alongside businesses and do things that benefit us jointly. We don’t look to interfere in their operations.”