Don’t get buried by cascade systems

Cascade systems are only safe for brokers if they research the whole of the market and can prove to the regulator that this has been done, says Richard Coulson

People in the industry are talking about the benefits and pitfalls of cascading but brokers most of all must ensure they are clear about the process.

Cascading has only recently been introduced to the mortgage market. Brokers key in client information and if lenders respond with a ‘no’ for a particular type of product, an alternative can be offered within their product ranges. The system is faster for brokers and clients as even though the client is offered an alternative product, there is no delay in receiving a ‘yes’ response. Clients who have set their hearts on a particular property often pin their hopes on speedy deals.

For example, if clients are submitted as self-cert cases online and lenders discover they have a higher level of adverse than self-cert allows or that brokers were aware of, the system will cascade to the appropriate sub-prime self-cert products rather than decline the cases.

From a lender’s perspective, cascade systems can work well. Covering the spectrum from prime to sub-prime, lenders seek to develop the best products to suit every client circumstance. In their eyes, they are not only helping brokers by offering an alternative product, they are also helping the client by offering the most suitable product for their needs.

Lenders are keen to point out that cascading does not just move clients downward. In many cases, sub-prime category clients are cascaded upward.

A client might believe that the County Court judgement they were served with years ago is still in place. In reality it might be so old that the lender does not think it relevant. In these cases, the clients cannot complain as they are likely to secure better rates.

But following the introduction of mortgage regulation, cascading could lead brokers to fall foul of the Financial Services Authority.

Today, if a broker recommends the next best option from a lender to a client, they could be in danger of losing their licence as they could be seen to be offering the client an alternative product without checking the whole of the market to see if it is the best option. The key is for the broker to check the next best option in the market and make an informed decision on whether the lender’s choice is best for the client. For the broker this can be tedious as the whole research process has to begin again. And once the broker has scanned the market again and has chosen an alternative lender, the client information has to be keyed in yet again.

Packagers can help. They use a generic form for brokers to key in client information which makes switching easier. They will not charge a new administration fee and will provide the best solution available from their panel of lenders. Some packagers work with only one lender on their panel that specialises in the sub-prime market or a small selection of lenders, which, while not whole of market, is representative of whole of market.

Clients might not get the rate they initially wanted but they are offered products that meet their individual circumstances.

But some packagers do not offer what are becoming known as ‘360 systems’ whereby clients can be moved up from sub-prime to prime or down from prime to sub-prime. Indeed, it is common for brokers to submit a case into the prime product range knowing there is history which will lead to a sub-prime solution from the same lender. Again the broker must research the market again and the file must show why the product was selected.

It’s an open secret that the regulator is alert to the fact that cascading can lead to some clients being mis-sold products. Nobody knows on what scale this is happening but with the sub-prime market already on the FSA’s radar it is logical to conclude that lazy brokers will not be able to evade it for much longer.

Sub-prime clients fall into the vulnerable category in the mind of the FSA. And with the higher margins earned by brokers specialising in the sub-prime field, the regulator is alert to the possibility of any cascade mis-selling.

Since Mortgage Day, brokers have not been able to get away with submitting sub-prime applications without supp- orting evidence because of the FSA’s fundamental rules on best advice. For those brokers who don’t follow the rules, we should wish nothing less than the full force of the regulator to be brought to bear upon them. They give the industry a bad name.

I know I keep banging on about Treating Customers Fairly, the principles-based regulatory framework the FSA would like us to operate within, but we should all be aware of where this could lead. It is easy to fall into the trap of not checking whole of market options. Lenders are not responsible for ensuring that brokers who recommend the next best deals have followed the FSA’s rules on best advice. Their job is to offer choice, speed, efficiency and responsible lending to brokers’ clients.

Automatic cascading is a great development for the market but it is only a reference and is safe only if brokers thoroughly research the market and can prove that this has been done. Only then have they earned their fee and the loyalty and trust of their clients.

When the best advice is to stay put
Location, location, location. Yes, it’s still the biggest factor when it comes to house prices. Most buyers know they will have to pay much more for properties in desirable areas than they would for equivalent residences in less desirable locations We might not like it but on average the price difference is 36%, according to Nationwide. And in some of the most salubrious addresses, it can represent a massive 90% difference in house prices.

But buying a property in these areas is not always the best way to make a profit on your property investment.

Many people have realised that instead of moving they can add value to their homes by converting the loft, adding extensions and moving existing walls to create extra rooms.

Adding an extra room increases a property’s price by almost 11%. And I was staggered to find that having a garage can make such a difference – in Edinburgh, having off-street parking instead of an integral garage can lose you as much as 30,000.

Mortgage brokers should research their client banks and be aware of which clients are due for remortgaging. If they can’t afford to move up the property ladder, perhaps they should consider staying put but adding value to their homes.

Having a good relationship with an estate agent in your area can help you better inform your clients as to the value of a converted attic as opposed to new conservatory. We must always be looking for more ways to do business.