Many years ago, so long ago I can’t remember the exact year, Citibank introduced affordability into its lending criteria. Forget about income multipliers.Citibank would lend an amount of money such that the borrower’s monthly mortgage payment was not more than 35% of their net monthly income, this being their take home pay less outgoings on personal loans, credit cards and the like. This innovative approach, as it was at the time, did not last long. Brokers could not work out what loan amount their client could get from Citibank. But from The Woolwich, for example, they could get 3 + 1 their gross salaries, or 2.75 x the joint salary, whichever was the higher. Brokers at that time did not need sourcing systems or even calculators to work out the numbers. So The Woolwich and all the other income multiplier mortgage lenders got the business and Citibank withdrew from the scene to lick its wounds. Now affordability calculators are back with a vengeance, appearing on an increasing number of lenders’ servers and accessible via their websites. Akin to credit score systems, they give the impression of being something of a black art. Using client data entered by the broker the calculations are a combination of formulae and algorithms, connections to credit checking agencies and flexible tweaking by lenders depending on their business targets, tranches of fixed rate money etc. If your inside leg measurement is more than 32 inches you are less likely to be short and obese and hence a client of higher expected longevity and profitability. So you will be offered a higher loan amount than shorter people. I joke of course but this illustrates a key point when considering affordability calculators – there is no point in trying to understand how they work and how they calculate loan amounts. And why would you want to understand them anyway? There is no way to bypass or circumvent the black art unless you tell porkies about your applicant’s characteristics such as age, income, dependants or occupation. All you need to know is that the loan amount that pops out of the calculator is the amount the lender will provide as a mortgage loan, provided you and your client have been telling the truth. Lenders are protective of their magic formulae. In the past I have been told by some lenders that if brokers knew how the calculations worked they would find a way to circumvent them. Absolute nonsense of course, for the reason mentioned above. The real reason for this protective behaviour is more likely to be competitive jealousy and lenders not wishing to disclose their calculations to other lenders. Fair enough. Affordability calculators are an integral part of the risk assessment of the applicants and ultimately the expected profitability of the mortgage. That is not something lenders would wish to share with competitors who may be using inferior affordability calculations. Another plus for affordability calculators in the present era of low mortgage rates is that they conveniently disguise the income multiplier factor. At the recent Mortgage Strategy Summit in Jerez, Michael Bolton was on the platform speaking on behalf of his now ex-employer HBOS. Bolton made it abundantly clear that HBOS remains hyper-sensitive to media attention regarding its lending practices. In particular it fears accusations of allowing people to borrow too much money, of over-extending themselves and ultimately getting into financial difficulties. National newspapers may react in horror to lenders giving borrowers 5 x their income. Preposterous, they say. But that is because they choose to ignore – or don’t understand – the facts of the matter. When mortgage rates were 15% lenders were, without any adverse publicity, providing loans at 3 x income. With rates now around the 4% mark – or lower for discounted products – they can be lending up to 5 x income without making any difference to monthly payments. These facts were yet again highlighted by John Wriglesworth at the Jerez conference. What the affordability calculators do is allow lenders to loan 5 x income to borrowers without having to actually say so. It is but a small stretch of the imagination to envisage the calculators evolving into a full risk-based assessment of the applicants, and the mortgage rate quoted varying according to the applicant. All in all, one thing has become clear. Affordability calculators – or whatever they end up being called in the future – are here to stay. So where does this leave sourcing systems? Will lenders cooperate with the systems and provide them with the magic formulae? Watch this space.
7,000 brokers to be fined 1.75m
You will not have heard about this because it has not happened yet, but my confident prediction is that it will happen in June 2006. Andy Watson, head of the mortgage and credit union departments for the small firms division at the Financial Services Authority, says the regulator is taking a serious view of firms who failed to submit their Retail Mediation Activities Returns by the now lapsed extended deadline of September 9. The FSA has begun issuing 250 fines to more than 700 firms that failed to submit their regulatory reports. According to the FSA, this represents one out of every five firms. They failed to submit on time and will receive some form of enforcement action. One in five? That’s almost an armful, as Tony Hancock would have said – before he died that is. What will happen next April/May when all the smaller regulated firms – a further 20,000 of them – will have to send in their first RMAR? What percentage of these will fail to act by the deadline of May 7? Do I hear 20%, 30%, 40%, more? With 20% of major firms failing to act by their deadlines I would guess at 35% of smaller firms failing to submit their RMARs by May 7. That’s around 7,000 firms, and at the standard late filing fine of 250 each this adds up to the headline figure of 1.75m. If it has any sense, the FSA will add the 250 fines to its annual invoice next June. The money will be scant consolation to the regulator which will have to decide what to do about 7,000 firms that are, quite simply, breaking the law.