Balance, transparency and hype

Sally Laker, managing director of Mortgage Intelligence, looks at how the continuing liquidity crisis is damaging confidence in the commercial world and changing the relationship between lenders and brokers

Balance and transparency are subjects we sometimes struggle with and from company spokespeople to market commentators, there’s often too much use of hyperbole, both positive and negative.

The media and investment sectors may have a long-term perspective but it’s the need to offer short-term opinions on a daily if not hourly basis that drives spokespeople.

In turn, this means they are always searching for trends and headlines and sometimes lose sight of the bigger picture as they focus on the minutiae of situations.

Because of the speed at which news can travel these days and the impact that negative headlines can have, firms are also loath to admit to problems until the last possible moment. This may be a natural response but it does not do anyone any favours. Bear Stearns is the most recent company to hit financial problems in a public forum and right up until emergency funding was sought, liquidity was not a public issue for it.

Unfortunately, in current market conditions liquidity is an issue for everyone. Some firms are significantly better placed than others but because of commercial sensitivity, it is often difficult for partners to know how financially buoyant the companies they do business with truly are.

In recent years, this has not been a problem in the mortgage market. Volumes were high, house prices were rising, interest rates were low and arrears were falling.

The main concern was finding partners that could deliver on service and product. Everything else simply fell into place.

Now, commercial relationships have become a lot more tentative and complicated. Like nervous teenagers, firms have suddenly become unsure of each other and the confidence with which business was previously conducted has evaporated.

It’s no longer possible to take for granted the fact that partners will be able to operate as they have done in the past and parties on both sides of the lender and broker fence are assessing their existing relationships and examining how these can be made to work more effectively.

Brokers want to know that lenders will offer them the volume of well priced products they need for their clients, and that they are going to be around in the medium and longer terms. In short, they are looking for a level of commitment and certainty.

Brokers have watched numerous lenders shrink their operations and pull back from markets that they have been heavily involved within the recent past, and want to know who they can rely on.

For their part, lenders are nervous about access to affordable and steady funding and are determined to make the most of the money they have.

The last thing lenders need is for their broker partners to get into financial trouble and create problems for them to deal with in terms of uncompleted applications and unresolved proc fee payments. We’ve already seen examples of this.

Similarly, at a time when companies are having to focus on making their commercial operations efficient, they want to work with partners that are robust in their procedures and unlikely to fall foul of compliance requirements.

There’s no doubt that lenders are beginning to take stock of their distribution options and pruning them to suit their needs for the future.

Unfortunately, a number of companies have run into financial problems, making lenders increasingly nervous of who they deal with – and it will be some time before liquidity constraints are relaxed.

This being the case, how they use their capital and who they deal with will be all-important for lenders in the months ahead.

We’ve already seen that lenders are not planning to deal with as many partners as they have in the past and their priority is no longer volume but rather security, along with efficiency and profitability.

How lenders choose to do this will differ. Some are looking at growing the amount of business they put through their direct arms in a bid to cut the proc fees they pay. This also means they do not have to rely on third parties and the problems they might well create.

Others are eyeing the directly authorised and appointed representative markets and trying to decide whether it’s better to deal with one or the other. Perhaps a mix will best suit their needs and to achieve this, they may work with selected partners from both sectors.

Whatever happens, lenders will be looking towards financially sound partners with proven records and robust operational procedures. In difficult times, it’s normally the safest and most efficient businesses that succeed and these are the type of partners lenders are likely to choose to work with.

The challenge for brokers is to prove their businesses are sound and to make this clear to all. Thereafter, they will have to rely on lenders to supply them with the products and service they need.