Lenders’ window of opportunity

The lenders that move fastest to cooperate in making their affordability calculators available to the sourcing systems will steal a march on their rivals, 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.

Having operated the mortgageLink sourcing system for close on 20 years, we have seen a number of innovations such as true cost calculations, integrated mortgage and insurance quotations, links to decisions in principle, and links to the Mortgage Trading Exchange.

But there has only been one radical change in the underlying technology. This was the move from DOS to the Windows operating system in the 1990s.

We are about to see another radical change. This will be the transition to using affordability calculators for calculating loan amounts, and the attendant impact on the technology platform.

In my previous articles I have stressed the irrevocable move toward the use of affordability calculators by the lenders and how the sourcing systems must keep in step by moving away from using income multipliers. They must have access to these calculators. Otherwise sourcing systems will become defunct and brokers will return to the Dark Ages. In last week’s article I focussed on the probable reluctance – or downright refusal – of the lenders to hand over their calculators to the sourcing systems.

Even for those lenders willing to cooperate in this respect, the technical issues would be a fearsome development burden – a cost on the sourcing systems. Consider the plight of Trigold which has spent its way through 33m of shareholders’ money. It continues to make an operating loss and is due to repay over 5m of loans in 2006. This could be the straw that breaks the camel’s back.

The answer to this conundrum is relatively simple and is in the best interests of everyone. The sourcing systems will need to access lenders’ servers in real time; squirt up the packet of client details and have the loan amount returned to the desktop or laptop system on which the sourcing software resides. The operations will be seamless from the broker’s perspective. See the box on this page for a typical working scenario.

A requirement of this new working environment is that the broker’s desktop or laptop is permanently connected to the internet. With broadband available for 15 per month and increasing use of wireless connections, this is pretty easy.

There are many parallels with the type of search mechanism described in the box. The Exchange has been operating a service for many years that accesses the servers of various insurance companies in order to return life premiums.

So why is this article entitled, ‘Lenders’ window of opportunity’? If all the lenders cooperate in the manner described above, no lender will gain a competitive advantage.

The point is, the lenders could not all cooperate at the same time even if they wanted to. Lenders move at different speeds. This generally causes frustration to all parties involved in any cooperative venture.

Even the Council of Mortgage Lenders failed with its well publicised e-commerce initiative in the late 1990s due to the inability of lenders to work in harmony. The CML’s consultants at the time, KPMG, did quite well out of the exercise, earning over 500,000 in fees, but the mortgage industry ended up with bugger all. A small consolation for the broker community is that this money came out of lenders’, not brokers’ pockets. Their turn to cough up would come a short while later when the MCCB swung into operation.

Returning to the matter in hand, some lenders will seize the early mover advantage and cooperate with the sourcing systems, others will not for a variety of reasons. As a random example, take Northern Rock as the early mover and Halifax as the late mover, or switch them round if you prefer.

The sourcing system will operate in a hybrid fashion, though again the process will be seamless to the broker. For those lenders where the system is able to access the affordability calculator on their web servers it will do so. For those who do not allow such access, the sourcing system will use the traditional income multipliers stored as part of the product criteria.

The resulting league table displayed by the sourcing system will then show the available loan amount for each product. A flag ‘c’ will appear against the NR products to show they have been worked out by the affordability calculators on the NR web server. A flag ‘i’ against the Halifax products will show that the loan amounts have been worked out using income multipliers.

Let’s assume that the products are there or thereabouts in terms of features and cost, which are easy to compare on the sourcing system. As a broker, you have a choice. You can simply apply for the NR product with the confidence that the amount shown on the sourcing system will be the actual loan size offered.

Or you can log onto the Halifax website, directly access its server, key in all the applicant details (again) and select the product in order to find out the precise loan amount that will be offered to your client.

Faced with this choice, what are you going to do? You don’t need to be Brain of Britain to realise most brokers will opt for the easy and quick route and apply for a Northern Rock product.

This is the early mover advantage. Halifax will eventually have to join the game or it will increasingly come to resemble King Canute holding his hand up to halt the incoming tide.

Next generation mortgage sourcing

You, the mortgage adviser, are in front of your PC or laptop which is connected to the internet.

To source a mortgage you enter your client details as normal, setting the usual filters such as fixed rate, cashback etc. The software whizzes through the whole mortgage database on the sourcing system.

One by one, the software checks each product to ensure the criteria fits the applicant’s requirements (type of applicant, LTV etc). For these qualifying products the software – through the open internet connection – squirts up the applicant details and product identity to the relevant lender’s server which in turn will return the loan amount instantaneously.

The source may be over many hundreds of products but the process takes place in a matter of seconds and you end up looking at a league table.

Essentially there is no change to the interface between you and the sourcing system.

The main difference between this and the current system is that your PC or laptop will have an open connection to the internet.