This may sound like an odd thing to say as we are all trying to come to terms with the turmoil created by the now infamous credit crunch, but in years to come we may just look back at this debacle as a blessing in disguise.
Before you condemn me as being raving mad, let me explain what I mean. I suggest what we are currently experiencing is the pain from which intermediaries will eventually gain.
This period of re-adjustment – which I do acknowledge means real hardship for some – may be a necessary evil which puts the mortgage market back on an even keel. It may be a difficult concept to grasp when you have to tell borrowers that they can’t have a mortgage, or not at the price they want it, but it may just be what is needed to prevent more serious problems manifesting themselves in the future.
Looking at the facts
Consider, for a moment, the mortgage market during the first half of this year. Demand for mortgages was at an all-time high. By July, gross mortgage lending had reached a record breaking £34.4 billion, a 13 per cent increase on the same month last year. Five interest rate rises had done little to quench consumers’ thirst for mortgages and the Council of Mortgage Lenders (CML) was forecasting a record £360 billion of lending by the end of 2007.
In order to protect and grow market share, lenders were having to shave margins to the bone to ensure their products remained competitive. In the non-conforming sector, there is no doubt that lenders were pricing for market share rather than pricing for risk and we were starting to see the first signs that procuration fees were under pressure, as lenders looked for ways to keep costs down.
In the prime market, many two-year products were loss leaders, where it was difficult to see how lenders were ever going to make a positive return. There was a real danger that lenders increasingly started to sell prime mortgages through direct sales channels, because they simply couldn’t afford to cut brokers in on these types of deals. If this trend had continued, brokers may have ultimately ended up in a position where they were only able to sell specialist mortgages on which there was sufficient margin to pay them a reasonable fee.
The credit crunch is, without doubt, a period during which all lenders will reassess their portfolios, criteria and pricing. Margins will be restored and there will be a flight to quality rather than volume. In the short term these changes will hurt – the market will not grow at the same rate it has done in the past and, if brokers make no changes, they may well see their income slide next year.
Positive consequences
However, there are two positive consequences to this for intermediaries. Firstly, healthier margins for lenders means the pressure is lifted from broker procuration fees. Secondly, tighter lending criteria and more choosy lenders means brokers are more important to consumers than they have ever been before.
Don’t underestimate the importance of this last point. Borrowers are aware that mortgages are becoming more expensive. They are also aware that lenders are becoming more selective and that it pays to shop around. Most consumers also have little inclination to do this for themselves and would much prefer an expert to find a decent mortgage for them – especially one who is independent and can search the whole market.
In the over-supplied mortgage market of just a few months ago, there was a danger that a significant number of borrowers believed that, armed with a laptop and the best buy tables from the weekend papers, they could sort matters out for themselves. The recent credit crunch will undoubtedly act as a harsh reality check and make many consumers once again recognise the true added value which professional mortgage brokers are able to deliver.
Does this mean I’m glad the events of recent weeks have happened? Of course not. I would have much preferred the market to keep on growing and for us all to be able to make more money. But I’m a realist and accept this is an unrealistic pipe dream. What’s happened has happened, but I do believe that mixed in with all the bad news are some benefits that will make the market a better place.
Be aggressive
This is, however, just so much philosophising. It’s easy to be wise in hindsight. The important thing is what brokers do to make the most of the market as it is today and as it will be tomorrow. My recommendation is to come off the back foot and go on the offensive. This is a time to aggressively promote your services. Make prospective clients aware that you can help solve their mortgage problems by finding deals they may well be unable to find for themselves. Also make sure you take every opportunity to increase your revenue per mortgage completion by selling essential associated products and services; from life and protection insurance to Home Information Packs and arranging conveyancing support.
The market next year is going to be tougher, but that doesn’t mean brokers have to let their businesses suffer. Research by Paragon shows that brokers are currently handling the highest volume of mortgage business for eight years and CML data confirms that brokers account for approximately two-thirds of all new mortgage business.
Brokers are critical to the future success of the market. This is a time to reaffirm your importance.
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