Everybody loves an underdog – but can you be an underdog in today’s UK mortgage market and survive? Can the smaller lender and intermediary firms survive? There is speculation that more smaller organisations will have to consolidate in order to stay in business. With the pressure and expense of operating in a regulated market – how can smaller organisations pave their own way in the UK mortgage market?
There have been a number of casualties in recent months and that trend is set to continue for intermediaries and lenders who don’t re-invent themselves. So who will be the winners and the losers in 2007?
Goliaths
In 2006 there were several new entrants into the UK mortgage market. Deutsche Bank & Morgan Stanley entered the fray, as did edeus, which is funded by the deep pockets of Merrill Lynch. Others of note include Mortgages plc – also backed by Merrill Lynch and making real inroads with its innovative products, keen pricing, new technology and an extensive team of field sales support. Of the established players, HBOS, Lloyds TSB, GE Capital, GMAC-RFC, BM Solutions – the list goes on and on. None of these organisations are here to ‘have a dabble’ – they want serious market share and that often means sacrificing margin to get to the top of sourcing system ‘best buy’ tables. The Goliaths have the balance sheet muscle to sustain a rate war. Look at the way Advantage Home Loans is currently pricing and you will see evidence of its ability to call on Morgan Stanley for some hard hitting power.
Sameness
In terms of products, the big boys offer a mind numbing degree of sameness – with a few exceptions, of course. With remortgaging levels at their lowest ebb for five years, those lenders that can come up with true innovation will win valuable market share. Customers are changing – and both lenders and brokers need to take heed. The days of the two-year deep discount are numbered. Flexible mortgage products that offer long-term true value backed with good service are becoming ever more appealing to customers who don’t like the taste of mountains of paperwork and costly exit and establishment fees every 24 months. ‘The One Account’, First Direct and Intelligent Finance are well placed to capitalise on this continued growth – products which could make up in excess of 30 per cent of sales by 2008.
Davids
The smaller but nimble players include the likes of Money Partners, funded by Kensington, Platform, which is funded by Britannia, and Victoria Mortgages, funded by venture capital. Money Partners doesn’t have the balance sheet muscle of some of the big players but its volumes are thriving, making up ever bigger percentages of Kensington’s lending pie. It has done this by recognising who the ultimate customer is – the mortgage broker. It has built an excellent team of field business development managers and its turnaround times make the Goliaths look genuinely tardy and dis-interested. In the non-conforming sector speed is king, not rate. Platform has some excellent products and great support, while Victoria Mortgages has been a revelation with its innovative products and excellent levels of service. It is taking away the bread and business of the Goliaths, but using its size to advantage and this trend will continue.
Don’t believe the hype?
Some of the big lenders have countered with IT solutions that promise the earth but fail to deliver on some key fronts. We have been hit with a plethora of new technology solutions. All sorts of new acronyms have become common place, POSD,
Pos-V, AVMs, online this, instant that. Unfortunately – the hype rarely matches the reality. It is notoriously difficult to correctly source non-conforming finance from any of the major sourcing software packages available. Customers can innocently damage their credit profile, and these human factors will be overlooked by many prime lenders – all it needs is a phone call to a suitably qualified underwriter and they will hit the override button. The sourcing system response, of course, would have been a negative one.
Stephen Knight of GMAC-RFC has been pushing its technological prowess hard, claiming that a computer is much more reliable than a person when it comes to assessing the creditworthiness of clients. No doubt tens of thousands of applications gives a good basis for making this claim. But in my humble opinion, many brokers are distrusting of this new technology. Case in point – it’s very easy for a customer to attract a CCJ – for a relatively soft reason. Even disputing a traffic fine can lead to hot water before it’s all done and dusted and, hey presto, a damaged credit profile. A computer is not interested in the fact your customer has a perfectly valid reason for having a black dot on their credit profile – and this is where the smaller more flexible lenders, who will listen to the customer – that’s the broker – and authorise an exception. Lending is not black and white – it’s all shades of grey. The winners will recognise the limitations of technology.
Tough times
On the broker front things are tough for the smaller players. The cost of business has become too much for many, and those without a very close eye on costs will perish. Prime margins are under continued pressure, and as the non-conforming mortgage sector matures, the same will happen.
So how to survive? It’s easy to forget that about 40 per cent of mortgage broker distribution is made up by one and two-man bands – so staying ahead of the game is no mean feat. The Goliath brokers are doing some large scale business, phone-based and fee-free. Given the miserly procuration fees paid on prime business – it could be a zero sum game, or worse, loss making – don’t be afraid to charge a fee for service, especially if you operate face-to-face. The other factor to mention is compliance and the Financial Services Authority. There are lots of very capable brokers out there doing their misguided best. Many have arms’ length assistance from their networks and going forward that is a recipe for disaster, especially with the regulator dishing out some hefty fines.
Smaller brokers need to be very good at what they do. Attention to detail and looking after the client bank is the key to success. The other factor to consider here is product choice and the service your valued customer will receive from the lender you have diligently sourced for them. Rate is not the be all and end all. Ask your customer if service from the lender is important. Would they prefer UK-based call centres? Or speak to part-time yak herders in the Himalayas? These things do matter – and your customers will vote with their feet if the back-end service lets them down.
The other key to success for the smaller broker is have a diversified source of leads. Online suppliers can be notoriously patchy with the quality they deliver. There’s no substitute for personal relationships, like local accountants, estate agents or surveyors. I know a broker who gets leads from his milkman, who tells him whenever a ‘for sale’ sign goes up in his area.
Ultimately there will be consolidation on both the lender and intermediary side. There has to be. There are a group of hungry new entrants within the lending market, particularly in the non-conforming sector – and they want market share. Growing it homogenously is expensive and time-consuming. Acquiring can be a quick way to succeed if the target lender has good distribution, good margin and a quality portfolio.
Acquisitive lenders will also be casting a careful eye over the larger and niche intermediaries – as it’s their distribution capability that’s attractive. Mortgages Plc recently ‘took out’ Freedom Lending, which highlights this activity. There will be more to come. Does this mean then the big will get bigger and the smaller players will wither away? There is not doubt the industry is in for a period of consolidation, but we should all view this activity for what it is – not a threat but an opportunity.
