It would be fair to say that for a while now the mortgage industry has been marking time and until recently there had been little in the way of the product innovation that has made this country’s mortgage sector the envy of the world. This is unsurprising as most of us were preparing for the rigours of regulation and wondering how exactly it would all pan out in the real world.
In fact, there was a real fear a couple of years ago that regulation would stifle innovation and firms would be left selling very similar products in the marketplace that conformed to the regulator’s demands. Lenders turned away from designing products and instead focused on being able to manage their business processes in the new regulatory environment.
For most that meant concentrating on technology, and all that mattered was whether they could produce a key facts illustration or not.
The trouble with technology is you can get bogged down in it to the detriment of other areas of the business. It is easy to get excited about the bells and whistles and the professional patter of the software salesmen to the point where you believe the right software is the panacea to all the problems regulation poses.
Few realised the cost and time the introduction of new IT systems, or the reconfiguration of existing ones, would take up. It was those lenders that had the task of dealing with legacy systems that faced the greatest challenge and it would be fair to say some struggled to make them work. This diverted time and resources away from what they do best – delivering innovative products to the market. It also created a gap in the market for new players to fill.
More recently-established lenders could take advantage of the situation because they had new systems in place. Accord, First Active and BM Solutions were all ready before M-Day and enjoyed a head start with brokers in offering compliant products and processes because the bigger and more established players were struggling to update their systems. This meant product innovation took a back seat. Even when more established firms were happy they had got their back-office processes up to speed it took time for them to bed into the ” There is new thinking and in truth the start of innovation in the brave new world post regulation”regime and work within the new guidelines.
Slowly but surely we have seen things start to change to the point where a number of lenders are now venturing into new product areas that they had previously avoided. Buy-to-let, sub-prime and light adverse have all taken on a new lease of life as more products came to market with existing lenders trying new product routes.
At the same time, the market has seen the arrival of a plethora of new lenders, all looking to launch in the specialist product areas. But this time the model is different. Many of these new lenders were looking to securitise their book of loans, which meant they avoided keeping the debt on their balance sheet for any length of time. This gave them greater flexibility and meant they could react quickly to new developments in the market.
This business model reflected a very different attitude to that employed by the large existing lenders which were struggling to combat the retention problems created by a more savvy customer base that chased around for better rates. So on the one side we have retention and questions over how to hold onto customers, and on the other side we have sellers that will not be concerned with retention once the discount/fixed period is finished, as the book will be owned by someone else long before that.
This has brought new thinking and in truth the start of innovation in the brave new world post regulation. Interestingly, we are seeing a change in the distribution needs of lenders too. Those lenders that have always previously dealt through the packaging channel are starting to look at dealing direct with networks. Lehman’s now hold Southern Pacific Mortgages Limited, London Mortgage Company, and Preferred all under one roof, so that will be an interesting combination to watch as the trio develop their strategies.
And the big organisations such as Lehman’s, GE Money, and Merrill Lynch – which snapped up Mortgages PLC quite a while ago – which are very prominent in the buying of mortgages in the securitisation market, definitely also have an appetite for mortgages. Their involvement should help to ensure the mortgage sector continues to grow and develop for the benefit of us all. The future is bright, the future is mortgages.
By Sally Laker, managing director, Mortgage Intelligence