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Regulation costing mortgage industry millions

Mortgage lenders’ processing costs have increased over the past year by as much as 69%, around £123m for the sector as a whole, according to Marlborough Stirling’s mortgage benchmarking study.

This is the third year that Marlborough Stirling has conducted the benchmarking study, which has been developed in consultation with the Council of Mortgage Lenders to provide an independent industry benchmark of operating performance standards.

18 lenders took part in the survey, making 2005 the most comprehensive survey yet. The scope of the study this year increased to include arrears and customer retention, as well as focusing on point of sale and application processing functions and intermediary business, as in 2004.

The average cost of processing applications increased from £89.67 per case in 2004 to £146.49 in 2005, a rise of 69%. This follows a decrease in processing costs in the previous year from around £116 per application in 2003. If all lenders experienced similar increases then the total would be as much as £123 million for the sector.

In addition to the increased cost of processing, the benchmarking study shows that lenders are facing a number of challenges in the newly regulated mortgage market.

Lenders are processing fewer applications per consultant this year than in 2004, with productivity per employee dropping from 1.70 completions per day in 2004, to 1.18 per day in 2005. This is lower than in 2003, when applications per consultant were at an average of 1.56 per day.

The study found that time taken to process applications improved in 2005 to an average of 14 days for new business, compared to 16 days in both 2004 and 2003.

There has been a significant change in the ways that lenders are differentiating themselves through cost and quality compared to 2004. More lenders now fall into low quality segments, and half the lenders sampled now fall into high cost sectors, compared with only 29% in 2004, yet, a significant number of lenders are still occupying the compromise position of mid-cost, mid-quality.

As with last year, lenders in general still receive 67% of intermediary business in paper format which has to be re-entered into their processing systems, leading to increased costs and higher risk of errors.

However, two thirds of lenders now provide online KFIs, reflecting the increased use of technology amongst intermediaries and regulatory requirements for high levels of accuracy.

The move towards providing online KFIs was signalled in last year’s study in which most lenders said they had plans to deliver this service.

New for 2005, the study shows on average an arrears rate of 1.83% of mortgage book value for anything above two months in arrears. CML research shows that while arrears and repossessions are on the increase, absolute numbers are very small. The CML expect this trend to continue over the next three years but in relative terms would stay low.

Factors contributing to this rise in arrears could include rising interest rates and high levels of personal debt. However, the positive equity cushion that many homeowners enjoy appears to be having a stabilising affect.

Another new section for 2005 analyses lenders’ customer retention figures. The study compared the percentage extra cost per case involved in obtaining a new mortgage every two years, compared to retaining an existing mortgage over a ten year period.

Few lenders were able to supply data on this but for those that did, the results showed that it is more expensive to obtain new customers every two years, averaging around 41% extra per case.

David Edwards, managing director of Marlborough Stirling’s mortgage business, says: “The excellent improvements in mortgage processing by most lenders in 2004 appear to have been reversed in 2005. Regulation was probably a major factor in this reversal.

“Many lenders have found it difficult to reconcile the needs of M-day with maintaining low cost high quality services. Most Lenders now face the challenge of addressing their internal processes and back office system inefficiencies whilst competing in a stagnant mortgage market with dramatic pressure on margins.

“ For those that survive these challenges next year’s study will highlight how effectively they have managed to tackle this challenge.”

Michael Coogan, director general of the Council of Mortgage Lenders, adds:

“Demand for the benchmarking study continues to grow each year and it has rapidly become an important reference point for mortgage lenders. The benchmarking study clearly identifies many of the challenges facing lenders in the post-regulation environment and overcoming these is the key to remaining competitive. We look forward to working with Marlborough Stirling on this study again next year.”

The benchmarking study is designed to enable lenders to identify areas of competitive advantage, to increase efficiency and reduce costs while maintaining appropriate service levels. Marlborough Stirling developed the benchmarking questionnaire, in consultation with the CML, enabling lenders to supply the required data against which to benchmark their operations.

The completed data is fed into a mortgage processing model which enables lenders to evaluate business costs, quality and productivity against the benchmark.

A management report is produced for each participating lender highlighting key strengths and weaknesses, and observations and recommendations to add value to their strategic planning process. Additionally, Marlborough Stirling provides a presentation to each participant’s senior management team highlighting the key findings. Confidentiality of participants’ data is ensured throughout the process.

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