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Mortgage: impossible

There’s been a lot of talk about the credit crunch and its effect on mortgage availability recently, but when we asked mystery shopping expert AMTI to find out what high street lenders are prepared to offer even we were surprised. Martin Reay reports

In the September 2008 edition of Lending Strategy I looked at how market conditions were potentially moving in favour of more traditional lenders and questioned their readiness to take advantage of those conditions.

Mystery shopping indicated that some lenders were missing out on chances to maximise their potential and needed to look hard at their sales and compliance processes to ensure they were delivering the right level of service to customers that gave them long-term benefit.

Last month we revisited the high street to see how lenders are dealing with mortgage enquiries against the backdrop of today’s unprecedentedly rough market conditions.

From January 8 to January 13 AMTI Services conducted a short mystery shopping programme across six lenders – three banks and three building societies – in Yorkshire.

Two scenarios were used for this exercise – that of a first-time buyer and that of home owner looking to remortgage. In each scenario the potential customers had good credit histories, a good salary for their age and few outstanding loans or other commitments. In all respects, these shoppers should have been potentially good customers for our lenders.

While the sample used in the exercise cannot be seen as statistically significant the exercise does give a flavour of what is happening on the high street through first-hand accounts of customer contact.

First, in terms of dealing with our initial enquiries, those lenders that had a policy of encouraging customers to contact their local branch did much better when it came to seeing customers quickly and building rapport.

Organisations such as Barclays and Nationwide Building Society which process initial enquiries through central call centres incurred delays in speaking to customers and often failed to deliver promised service standards.

In one case, a potential customer was not called back for five days despite being promised by the call centre that someone from the local branch would contact them within two hours.

Some lenders seem to have issues when it comes to trying to fit customers into appointment slots, with Britannia Building Society not being able to see a potential FTB for more than a week. This seemed to have more to do with staffing issues than the society being overly busy, but other lenders such as HBOS, NatWest and Skipton Building Society were able to arrange appointments within 48 hours.

Once our potential customers were able to get into a branch to discuss their options more fully, the service delivered by all lenders was good from both the product presentation and the compliance standpoints.

The overall winner of our exercise in respect of ease of customer contact and service was HBOS.

Products

But what about the products on offer and, more importantly, the lending policies being employed?

When you look at mortgage product tables it is clear that lenders have cut back on the number of products they are making available. They have also scaled back their published LTV ratios to the extent that finding a 95% LTV product is now just about impossible.

At the time we undertook our mystery shopping exercise lenders were digesting yet another Bank base rate change so some products were being withdrawn. Even taking this into account, the choice of products was surprisingly sparse.

One lender, Skipton, only had a small number of fixed rate products on offer and it – like others including Nationwide – could not offer customers any variable rate deals.

Nationwide was able to offer a base rate tracker but you have to think how times have changed when a building society can’t even offer its customers a bog standard SVR.

Without SVR options customers are often forced down the route of fixed rate or tracker-type products, most of which have significant upfront fees and back-end repayment penalties. Several of the product fees we were quoted were in ex-cess of £1,000.

But the biggest issue was the amount lenders were prepared to advance.

NatWest was advertising mortgages up to 95% on posters in its main banking hall but when speaking to the mortgage adviser on the premises it was clear that the maximum was 90% – and this went as low as 75% if you were considering buying a flat rather than a house.

Most lenders had published maximum LTVs of between 85% and 90% although as you might expect, products at this level were more expensive than those at lower LTVs.

Multiple choice

The income multiples we were quoted varied between 3.5 x and 4.25 x salary, and all lenders assessed were cautious when it came to calculating the true LTVs they were prepared to offer, especially to our FTBs.

All the lenders made a big thing about affordability and how they were calculating the amount they were prepared to lend to ensure that customers were not overextending themselves. That should not be surprising as this has always been the case. However, the level of scale-back was astonishing. Lenders were clearly applying some extremely strict affordability criteria.

For our FTBs, the maximum LTV offered by lenders on a £100,000 property varied between 66% and 80% based on the same basic salary and commitments scenario.

That means that even if they can find a property to buy for £100,000 (and in some areas that is just about impossible) FTBs might have to find a deposit of £34,000.

How FTBs are expected to find such levels of funding seems to be a question for their parents. In all cases, the offer of a parental guarantor – so popular in the past – to help get a higher LTV for FTBs was rejected as not being “within policy”.

But lenders were prepared to consider remortgage and equity release schemes to release funds from parental properties to fund mortgage deposits and one even suggested the parents take out a personal loan, despite them having a mortgage-free property of their own. For our remortgage customers LTVs were less of an issue, but nevertheless applications with less than 20% equity will be a challenge with some lenders.

We hear a lot in the mainstream press about the banking system being short of funds so is this situation one of lenders effectively rationing mortgages or is it more to do with lenders simply not wanting to lend?

Well, seemingly more the latter if you ask lenders at a local level. When asked, all our lenders said they had plenty of funds available and that there were no limits being placed on them at a local level as to how much they could write.

It seems to me that without some greater impetus within the market – especially to get FTBs back into it – we are not going to get out of this jam.

House prices have fallen significantly, interest rates are at record lows, there is still a long-term shortfall in the country’s housing stock and the government has bailed out the banks to an unprecedented level in an attempt to keep them lending to businesses and consumers. In anyone’s book these are surely conditions that should be seeing at least some parts of the market picking up. Alas, this does not seem to be the case.

What else can be done?

I think lenders have a part to play. There are good quality long-term customers out there who have affordability issues basedon current lending policies and products.

It seems that mortgage product and policy innovation has gone out of the window, with lenders reining in their aspirations to an extent that they are not doing what they are there to do – lend money to people to buy houses.

If lenders have sufficient funds available they really should be able to be more creative in their product offerings than adopting a do-nothing stance. The market has gone from the sublime to the ridiculous in a few short months and customers are confused.

The government might also have to do more. Instead of taking a scattergun approach to problems, a more targeted approach would be helpful. How about looking at developing a second charge or shared equity scheme for FTBs (or even all borrowers), with the government lending the top 10% of the mortgage?

This could be done at a commercial rate, with buyers still having to put down a minimum deposit of 5%. It could also be developed with minimal medium-term risk to taxpayers, especially if a realistic LSapproach to valuation is taken.

Indeed, I think there would be more public support for initiatives such as this than there has been for those tried to date. And the government even has the administrative capacity to run such a loan scheme, given the resources it has available within Northern Rock and Bradford & Bingley.

Calming the current turbulence does not mean either lenders or taxpayers have to make a loss or take massive risks, but it does require that all parties should be creative and bold.

Would you like to know more about mystery shopping?

Martin Reay has worked in the mortgage market for more than 25 years and undertakes special projects and assignments to help organisations improve their sales and customer service effectiveness.

He is also a director at AMTI Services, a company that specialises in mystery customer programmes with a particular expertise in the financial services industry.

If you would like to know more about the mystery shopping programme you can contact Reay by emailing him at martin.reay@amtiservices.com or telephoning 07884 117562.

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