When we were all young scamps in flat caps and shorts, one of the lessons our parents taught us was that all actions in life had consequences. Therefore, picking on your little brother or sister would have the consequence of being sent to your room, while pinching penny sweets from the corner shop would result in a good hiding and being dragged, ear-first, to confess your sins to the shopkeeper.
However, there were always occasions where you would seemingly get off scot-free and there would be no penalty to pay for your actions. While I’m not going to confess such incidents on these pages, I would ask you all to look into your hearts and recognise where you may have wrongly got the rub of the green.
If your conscience is clear, it could be suggested that you’re lying. For if you won’t acknowledge any childhood faux-pas’, then it must be said that as brokers, you’ve been robbing lenders blind over recent years.
“I don’t want to sound like Harold MacMillan but the customer has never had it so good,” remarks Paul Howard, director of intermediary sales at The Mortgage Works. And he is right, as the last few years have seen lenders’ profit margins eroded to the point of collapse. As Howard admits, lending is painfully lacking margin.
“For some years now we have seen margins eroding in the prime market to the extent that much prime lending is done at a loss. That affliction seems to be attacking the specialist market. Thankfully most of the margins are positive but they have reduced significantly in the last two years.”
No choice
You can see why this has been the case. Increased competition, both from existing and new lenders, on the back of the longest period of economic stability and house price growth for years, has meant lenders have been undercutting each other in an attempt to remain competitive. This situation may have been fantastic for intermediaries, who have been able to offer their clients great products, but lenders have had no choice but to continue to court the broker at the expense of their own pockets.
Peter Curran, head of distribution at Bank of Scotland, concedes: “In the last two or three years, the public have had some phenomenal rates. We’ve been having the debate internally at HBOS over how to cope with it as we wouldn’t be overly keen on having products out there that were making losses but we don’t want products where we were making a little profit but weren’t competitive.”
Lessons learned?
HBOS has already learnt that particular lesson this year, when it admitted it got the pricing of its retention products wrong and saw its market share halved in Q1 2007. Since then, brokers have again profited as HBOS priced keenly across its brands in an attempt to regain lost ground.
But how long can this last? If lenders have continually priced to the point where they aren’t making any money, something has got to give. For Curran, arrangement fees are the area where the market has started to see movement.
“It is strange but most people would rather pay a £495 fee for a reasonable rate than a £1,500 arrangement fee for a great rate. I think there’s a psychological fear of choosing a large fee. Now, people want a below Base Rate product but over the next 12 months that will evolve, with people becoming more comfortable with paying a higher fee for a better rate.”
However, with brokers having voiced their discomfort with percentage arrangement fees in recent months, there would still be a way to go before lenders could start counting on fees as that illusive source of margin. Plus, with the market being as cut-throat as ever, it would be an extremely brave lender that would stick its neck out and risk trying to price with more sensitivity to its own profits.
One conclusion
For Richard Barker, product manager – mortgages at Norwich & Peterborough BS, this leads to one conclusion. “I can’t see the prime market getting any more competitive as lenders are just not earning any money. In buy-to-let and non-conforming, the reduction in margins will continue so that where you previously enjoyed high returns, they will go down; but not as far as prime. I think you could see certain lenders getting swallowed up by larger institutions or falling by the wayside.”
Howard agrees: “I don’t think margins will get back to where they were – the supply is there to prevent that. Lenders will have to consider whether the return justifies the credit risk, especially in non-conforming. It will not be surprising if some lenders decide to exit the market.”
Change seems inevitable in one way or another because lenders cannot survive in the current climate. Brokers may have enjoyed a terrific run at the expense of lenders but they may soon start to feel the burn, with lenders talking of a return to more sensible pricing. But the movement may not be as extensive as lenders want as the market is a much different beast to what it was.
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