Light at the end of the tunnel

This month, planning a summer trip on Eurostar, I am in the mood for some train metaphors. Inspired by plucky little engines crying “I think I can, I think I can”, I am ready to power full steam ahead and consider some of the faint indications of an upswing in our sector – I have started to bore even myself with my tales of doom and gloom over recent months!

However, I can’t make any promises that the light at the end of the tunnel is actually daylight. It might just be the proverbial approaching train.

Firstly then, one good sign is that competition is increasing among lenders, with a number of institutions offering competitions and prize draws to win business from brokers. For example, there is the Dream Ticket competition being run by Northern Rock to attract brokers submitting a mortgage application. This may be a trivial indication by itself but it is a sure sign that competition is hotting up.
Secondly, there is the upward increase in Loans to Value, which is sure to help intermediaries who are in the first-time-buyer market. This has to be a good sign, as without first-time-buyers we all know that there is not much of a market.

A third sign of recovery around the corner is the welcome entrance of new lenders and the return of some old friends. However, rate margins are still an issue and will become more of a problem if lenders continue to maintain high margins as base rate inevitably increases throughout the course of the next few years.

Intermediaries would do well to bear in mind that some local and regional Societies still have good offerings available. In fact, let’s hope that they will be an inspiration to some of the major institutions, which could do with getting back on track in terms of offerings, especially fixed-rate offerings from their Treasury departments, since size in terms of Treasury makes for a cheaper rate.

Another area in which some of the smaller Societies are steaming ahead is that they have not all suffered the same degree of cost-cutting measures that have fallen on some of the larger institutions, possibly because they were always run on a leaner model. Hence their call centre staff are responsive and helpful by comparison with staff in some larger business call centres, who have been left embattled and embittered, or in some cases replaced by people who don’t have much of a clue.

There are further opportunities for institutions to make ground with intermediaries through attention to their underwriting models. Some institutions seem to be paying so much attention to looking over their shoulder at the regulator that they are forgetting the customer, which is poor in an industry that is supposed to be based on utmost good faith. The porous excuse that the computer says “No” is not really fair when the component parts of a particular deal are available, can be documented and substantiated but may not appear in the precisely the right order. It is a battle to get cases through the front door of some institutions, whereas others are winning business by their more flexible approach, without neglecting the rigorous demands of due diligence.

Our world is changing rapidly as a result of economic and sociological developments. Many clients do not have one steady unbroken career path, but make their living through a portfolio of jobs. This has an impact on, for example, affordability models. Unfortunately this is an area where there is little flexibility from any institutions and again, the computer is inclined to say “no”. It is regrettable that the regulator has not instructed institutions to catch up with the flexibility that government encourages in the workforce. The current policy of affordability is draconian in that it cannot take into account more than one source of regular income, without calling it a second job and demoting the importance of that income to sometimes 50% or less of its real value.

Some of the disasters which have beset lenders when repossessing properties in recent years could have been avoided if they had taken on board the type of full-blown financial underwriting that has existed in banks in the commercial sector for years. This takes account of the client’s net worth, for instance, including assets, income and expenditure and covers things like reading of the individual’s bank account. While a credit rating is a good indication of someone’s reliability, it is not the full story of who that person is.

However, all is not totally black in the tunnel and CML and Treasury have got together to say they want the European Mortgage Directive changing for the UK. It seems as if somebody may be listening after all.

On the subject of quality due diligence on the part of lenders, I would like to take you back to the last recession to look at an example of good practice. Those who can remember that far back may recall how people were able to get onto the housing ladder, or indeed stay on the housing ladder by using a product called a Low Start Mortgage. Whilst I have no particular desire to see this type of mortgage return, the way in which Abbey National handled the product was exceptionally good and could make a valuable contribution today.

Intermediaries were allowed to sell the product, but customers had to play their part by attending an interview at an Abbey branch, where they had to acknowledge that they understood what they were signing up to. They then signed the quotation, which was countersigned by a member of Abbey staff, giving both consumer and institution an extra degree of protection. The product was not sold willy nilly to those in desperate circumstances or to those who could not afford it. The extra level of contact with the lender meant that each party genuinely understood more about the other and that any potential problems were spotted at an early stage. Abbey National should take credit for that.
For institutions which have a network of offices and a reduced volume of transactions, this could be a valuable way of showing how interested they are in getting the right customers and giving those customers the best possible service.

Finally, another development in our sector is that this month the first meeting of the Financial Policy Committee (FPC) takes place. This is a new super-committee set up by the coalition to try to reduce the chances of another financial crisis by tackling any problems before they get a head of steam. The FPC is made up of a mixture of members from the Bank of England, the FSA and external representatives. There are many questions being raised about the independence, role and powers of the FPC. The idea is that it will apply the brakes if growth is too rapid or will take measures to stoke the boiler if growth is too slow.

We shall have to wait and see how this new addition to regulatory creep develops, but in the meantime let us take heart from the words of the engines in Thomas the Tank Engine, when they hear about Oliver’s tale of escaping from being scrapped. The engines declare that Oliver has “resource and sagacity”. Percy does not understand the words, so Thomas explains “I think it’s about being clever and wise.” Gordon declares “He is an example to us all!”

I wish all of you “resource” and “sagacity” as you forge ahead down the track!