Bob Young is managing director of CHL Mortgages
It’s always a positive to open a debate around a particular issue, which is why I was pleased to see Tony Ward of Homefunding furthering the debate on deleveraging with his blog on this very website.
It has been my view for some time that with 2012 likely to be a particularly flat year for mortgage lending we will instead see more of a focus from banks and other lending institutions in terms of how they can deleverage their loan books and thus reduce their risk and solve their funding problems.
Now deleveraging is easier said than done and many institutions will have little in the way of skill set, knowledge or experience about how to go about this. Many lenders for instance, will often consider how they can incentivise their borrowers to move their loans elsewhere.
Over the past few years a number of attempts have been made – lenders have either offered to cut the mortgage by a certain percentage and said they will ignore any existing early repayment charge on the loan.
All well and good however one suspects the uptake has never been particularly strong and, if done incorrectly, may leave the lender with something worse than a nagging worry about what type of mortgage book they will be left with.
For example, there is a very real difference between deleveraging a homeloan mortgage book and that of a buy-to-let lender. Traditionally the deleveraging “techniques” mentioned above have been attempted by homeloan lenders.
The problem for homeloan lenders is that these offers tend to be accepted by credit-worthy borrowers who have lower loan to value mortgages – in essence, the ‘good’ part of a mortgage book. Essentially, the borrowers you would want to keep hold of.
Unfortunately if you incentivise this group “successfully” what you may be left with is a homeloan book gone bad, that is one which now has a much higher percentage of high LTV mortgages held by borrowers who are much more prone to miss payments and run up arrears.
In essence, a riskier book. It is these types of borrowers who are much more likely to stay with you as they will have real difficulty in remortgaging; those who can remortgage will take the discount and move; those who can’t stay put. Not the end result that lenders will want to achieve with a deleveraging strategy.
Interestingly, the opposite is true in buy-to-let. Here, the “discount offer” deleverage process is likely to leave a buy-to-let lender with a much less riskier mortgage book than when they began.
The reason is that when making an offer to buy-to-let borrowers it will be those that have higher LTVs, those more likely to miss payments, those struggling to make the investment work, who will be first to accept it. And the likelihood is that these borrowers will not be concerned about whether they can remortgage away; instead they will be looking for an exit strategy which generally means selling up.
Those that end up staying with a lender are borrowers who are comfortable with their buy-to-let investment, are making their payments every month, are making profits on top and looking at the long-term nature of their involvement. They are much more likely to have lower LTVs and will stay where they are because they are happy where they are. They’re probably on good existing deals and are not interested in either remortgaging or selling up.
Just the type of quality, credit-worthy borrower that the deleveraging exercise was designed to have remain on the mortgage book. Obviously, these are broad generalisations however they are based on our experience.
As stated above there are very few organisations within the market that could successfully help lenders achieve their deleveraging aims in such a way. Indeed lenders with no experience of doing this would probably be better off using the services of organisations like Tony Ward’s to handle the process for them.
Deleveraging does have the potential to deliver the exact opposite of what you wanted to achieve and any offers to existing borrowers have to be targeted correctly to ensure the book becomes less, not more, risky.
However, as stated, in all likelihood we are likely to see programmes of deleveraging taking place throughout the year and beyond. Using the right expertise will be crucial and there is also a way that brokers can help, support and benefit from such processes. More on that at a later date.
