Sins & sinners

As Mortgage Strategy celebrates its birthday in what is shaping up to be an almost unprecedented year in economic history, we thought we\'d use some clever number play to bring you, in our seventh year, the seven deadly sins of the mortgage market - and nobody comes away innocent.

Pride

As the old adage goes, pride comes before a fall and our beleaguered Prime Minister Gordon Brown knows this more than most. His performance this year has been almost laughable. While the financial world was crumbling around him, Brown stood defiant – reassuring us from various photo shoots at infant schools and sports centres that everything was hunky dory. Yes, his pride got in the way of his duty.

He was willing to take advice about smiling more – no doubt some survey or other found voters in the 25 to 45 demographic prefer him when he’s smiling. He was all ears when his PRs told him he needed to be more fun Gordon and less dull Gordon. But advice on the economy? No way. After all, why should the former chancellor take such advice now?

Current comical chancellor Alistair Darling, it would appear, was more willing to be honest about the economy, as proven by the now infamous interview with the Guardian. In it he told us we’re screwed. But still Brown stood strong. Not only was his reputation as an economics genius on the line but he was still dealing with the spectre of his predecessor Tony Blair. Brown believed as long as he kept pretending things were OK the public would buy it. Why wouldn’t they? Everyone trusts a politician, right?

But pride is not going to inject liquidity into the mortgage market and it’s not going to save Brown at the next general election.

Gluttony

In tough times, it’s hard not to pine for the golden days when mortgages were plentiful, brokers were busy and industry lunches were a regular occurrence. When times were good lenders were falling over themselves to charm journalists and brokers alike, and the possibilities of corporate hospitality were endless.

You’d like a meal at The Ivy? No problem. A football match? Why didn’t you say so? You quite fancy a day out at Ascot? Well, then a day out at Ascot you shall have.

In fact, the industry was guilty of gluttony. We overindulged – a working week wasn’t a working week without three or four lunches, two black tie events and an afternoon off playing golf.

But when times get tough the corporate entertainment budget is one of the first things to go and for financial journalists today life is difficult. What was once afternoon tea at the Ritz is now a few pints in a local pub. A polo weekend at the Cartier has been replaced by an evening at Wimbledon dog track and, the hardest cross to bear, those thrice-weekly five-star lunches are now coffee meetings. Yes, journalists are finding it tough too.

With predictions that the market will not pick up for at least 18 months and widespread agreement that the cavalier lending of the past few years will never return, it seems the world of corporate hospitality has changed forever. But we’re the lucky ones. At least we have memories of days gone by. Journalists new to the industry will never know what a glorious time was had and what it’s like to order a steak at The Ivy.

Lust

Of course, it’s not just lunches and polo trips the industry is missing out on. Corporate hospitality often extended to more, ahem, niche entertainment establishments. While you’re worrying about your business volumes and your client database, spare a thought for those poor Peeping Toms of the industry who’ve not been able to indulge in their once regular trips to Spearmint Rhino, Stringfellows or some less classy establishments in months.

While corporate trips to ‘adult’ bars were never the type of thing lenders would issue glossy press releases about, there was an unwritten understanding that they went on. The prudes of the industry turned a blind eye to such events while many brokers and lenders received much needed boosts from them.

Now hard-up industry voyeurs have to do without the buxom lovelies who once cheered up many a corporate evening and instead are faced each day with the glum mugs of Darling and Brown spread across the newspapers. Talk about kicking a man when he’s down.

There’s also quite a lot of lusting going on in Parliament at the moment. As the Prime Minister takes the flak for the various calamitous errors Labour has made this year, party members have been plotting to take his job.

It seems Brown’s performance has led many in the Labour Party to believe they could do a better job of leading the country. Yes, various ministers have spent the past couple of months lusting after his position and chose the month of the party conference – and a time when support for the party is at an all-time low – to vent their spleens. Well done on showing a united front, guys.

Envy

Envy is a terrible thing. There’s little point being jealous of something you don’t or can’t have but it’s hard not to feel sorry for non-balance sheet lenders at the moment.

Following a horrific year for securitising lenders, which saw the majority of them disappear, it’s difficult not to feel pity as they watch green-eyed as balance sheet lenders go about their business. How different it was 18 months ago.

Back then non-balance sheet lenders were running the show. There they were merrily offering 100% plus LTV deals and 5 x income mortgages safe in the knowledge that their big investment parent companies were there to fund them.

Then came the credit crunch and suddenly those infallible investment banks we thought would never suffer started to crumble. If 2006 was the year of the non-balance sheet lender, with edeus, Advantage and DB Mortgages all making their mark, then 2008 was the year of their downfall.

Southern Pacific Mortgage Limited, Preferred Mortgages and The London Mortgage Company – owned by the now-bankrupt Leh-man Brothers – all bit the dust earlier this year.

Morgan Stanley’s vehicle Advantage didn’t fare much better, bidding its farewell to the industry in February.

Long before Merrill Lynch had to be bailed out by Bank of America it disposed of its UK mortgage business Mortgages PLC and just a matter of weeks before the takeover it also closed its niche product provider Wave.

Bear Stearns, thought to be the biggest crunch casualty on Wall Street when it collapsed in March – industry prophets didn’t see the Lehmans saga coming – closed its UK business Rooftop Mortgages in June following its takeover by JP Morgan Chase.

But balance sheet lenders have been hit too. Indeed, Lehmans’ collapse saw share prices for all the UK’s major banks drop considerably. But the consequences of the credit crunch for balance sheet lenders have been nowhere near as extreme as for those without them, with one notable exception.

For years other lenders in the industry have been jealous of HBOS.

“Look at it with its 25% mortgage share,” they would sneer. “Watch how it shows off with all that ‘I’m the biggest lender in the market’ crowing.”

HBOS was indeed the most prominent kid in school – admired and despised in equal measures. What was worse, it seemed like nobody else would get their chance to be the bigshot.

Then all of a sudden the stock market took a battering and big, bolshie HBOS suffered more than most. Suddenly the lender everyone envied needed help.

Enter Lloyds TSB – one of the lenders that no doubt once desperately wished to be like the firm it has rescued. And now Lloyds TSB is the big kid on the block and the envious eyes of the rest of the mortgage sector are fixed firmly on it.

Greed

“Earth provides enough to satisfy every man’s need but not every man’s greed,” said Mahatma Gandhi. What earth didn’t provide was mortgages for US citizens who had no way in hell of repaying them. But for those folk there were lenders that would.

The simplest way to sum up the US sub-prime crisis that became the UK’s adverse disaster is greed. Lenders greedy for custom encouraged brokers to bring clients to them who should not have been allowed to look after $10 notes let alone mortgages.

Brokers, greedy for the inflated commission they were receiving from such lenders, happily complied without questioning whether borrowers should ever have entered into these sort of massive financial obligations.

And borrowers, greedy for what the other half had, signed up for the loans knowing full well they were struggling to pay the rent and so would struggle with mortgage repayments too. It’s difficult to pity someone who has lost out through their own greedy ways.

Yes, it’s sad reading interviews with such borrowers. Our hearts go out to Jenny and Brad who both work at Walmart for $2 an hour.

“Our broker told us we could take on a $300,000 mortgage so we believed him,” they weep. “Perhaps we should have been more cautious because he had no teeth and was on day release from Folsom Prison.”

Blame stupidity if you will, blame lack of regulation in the broker sector if you must, but personal responsibility plays a part too and many ignored it through sheer unadulterated greed.

It is impossible to mention greed without giving a nod to the City bankers whose greed for big bonuses led them to short sell. Yes, these private school chaps – whose mummies and daddies had a little word with one of the bigwigs in the City to land them a job – are as responsible for the downturn in the economy as rogue brokers in the US. As hard as it was to watch the stock markets crumble and witness the reverberations around the world, we were all a little buoyed to see the stricken faces of stock brokers as they watched their massive cock-ups come home to roost.

It brought a smile to many of our faces to see the poor little rich boys looking so fretful. No bonus this year, eh? It’s time to cancel your Christmas ski trip in the Alps and call the Porsche dealership to say you’ve had a change of heart – just don’t expect the salesman not to chuckle.

Wrath

In our seventh year we’ve learnt many things. The US public aren’t that good with money, our government isn’t that good with anything and the interim Crosby report wasn’t that good. But the one thing we’ve learned above all other nuggets of wisdom is that hell hath no fury like a broker scorned. Our readers have fought their corners this year and they’ve had plenty to get angry about.

The dual pricing row had them up in arms. While they fought for business, some lenders opted to offer better rates direct to consumers. Brokers wrote to Mortgage Strategy in their droves. In July one reader even referred to lenders as “a law unto themselves – just like Robert Mugabe”.

Brokers felt len-ders’ decisions to price direct deals more competitively meant they were not being treated fairly.

While lenders defended their right to do so, brokers refused to back down. Lara Mackie, a partner at MSL Partnership, summed up how the sector was feeling.

“It’s about time brokers stuck together and told lenders to get stuffed until they bring back a level playing field,” she told Mortgage Strategy’s Letters pages on July 14.

There was also anger in the packaging sector. As brokers fought to cut costs to stay afloat, some suggested cutting out the middle men i.e. packagers. This led to gloomy predictions that the packager sector was on its last legs.

In March Chris Gardner, a partner at National & Capital, whipped up a storm in the industry.

“Whatever anyone says, packagers are bleeding to death as they find themselves edged out of the value chain,” he told Mortgage Strategy in March. Packagers were furious and our Letters pages had never seen such a response.

“Presumably Gardner does not use the services of any of our members or any other packager so his knowledge of the advantages they can offer is less than perfect,” said Vic Jannels, chairman of the now defunct Professional Mortgage Packagers Alliance. “My warning to him is to be careful what he wishes for.”

Unfortunately for packagers, subsequent events have proved Gardner right.

Sloth

Patience and prudence are good qualities to have but laziness and indifference are not. The accusatory finger points firmly at the Labour government.

When the Northern Rock crisis broke the whole nation was on tenterhooks. It was a desperate situation and the public was worried. Surely the government would step in? No, not yet. Then the crisis deepened and the queues outside NR branches grew. A little government assistance here, please? Nope. Finally, five months after the collapse of the bank, Brown and his minions at last decided to step in and do something by nationalising NR, by which point its shareholders, having suffered more than 20 weeks of stress and turmoil, had missed out.

But everyone makes mistakes. One example of apathy should not warrant the government being tarred and feathered, should it? Ladies and gentleman of the jury, introducing exhibit number two, also known as the Special Liquidity Scheme.

As soon as the credit crunch hit in the summer of 2007, there was quiet confidence that the government would do something. By Easter of this year the industry was starting to despair. Then finally the government realised it probably should get involved and in April it launched the scheme.

It was announced that the Bank of England would inject £50bn into the market by trading mortgage-backed securities for Treasury bonds. The industry breathed a sigh of relief until it realised the scheme did not cater for sub-prime or new mortgages -in other words, those deals at the heart of the problem.

Still, it’s not as though nobody’s ever cocked up more than once, is it? OK, so the government was slow off the mark but it would get it spot on next time, right?

Wrong. The long-awaited Crosby report, which industry insiders hoped would suggest some form of solution for the mortgage market, has been that long in the making that the sector has almost given up on it. And the interim report didn’t help, a fruitless offering informing the market that the government might be better off staying out of it. Thanks Sir James, architect of HBOS, that was helpful.

But wait, we’re being cruel. There has been one occasion when the government did step in and that is the HBOS saga. The big rescue mission. Captain Brown saves the world. Except HBOS wasn’t in that much trouble and if he’d done more in the first place – which may have instilled confidence in the sector – he wouldn’t have had to be so heavyhanded the next time around.

Plus, putting an end to short selling after the damage has been done is a little slow off the mark, isn’t it? The words door, horse and bolted spring to mind.

The seven deadly sins have been a constant presence in the mortgage market this year. But ever optimistic, here at Strategy HQ we’re hoping the number seven is as lucky as it’s made out to be. In the meantime, keep your chin up and raise a glass to our seventh birthday. May we all be here to see seven more great, but perhaps less eventful, years.