The vast majority of mortgage brokers have been impacted financially in recent years by the time constraints associated with adhering to their compliance responsibilities, by the significant upturn in costs associated with increased personal indemnity (PI) premiums and by network membership.
To use a sailing metaphor, this has greatly slowed down a yacht once capable of very swift changes of course. Quickly tacking and within minutes putting itself more inline with market changes, the yacht now finds it has become a large cumbersome tanker. Instead of the person at the helm swiftly turning the wheel to change direction, a call has to be made to the boys in the engine room (compliance) putting in a request for a change in course and confirmation that the ship is able to make a sudden about turn.
However, despite the addition of weighty bureaucracy and the costs this brings, the days of the vibrant business are not over for everyone. If your network is not an ‘oil tanker’ then you should be able to thrive, but it has to be said some struggling brokers lay the blame firmly at the door of networks.
Reacting to members
It is important for networks to remember one very simple thing: their members are business owners and many are very successful entrepreneurs. If a network is too slow to react to its members, then they will look for alternative revenue streams and this is what we are seeing the secured loan market.
Like mortgages, secured loans have gone through a renaissance period over the past two years. The market has been in existence since the 1980s and there are specialised lenders such as Blemain and Prestige, who have dominated the market for many years.
Specialist brokers have been around as long as lenders and until 2004 it was a relatively closed market. Quite simply, you either understood it or you left it alone – there were no real grey areas.
c2-secured and some other larger distributors entered the market in 2004 and brought new ideas to the table on distribution and on enhanced technology. Lenders adapted their business models to assist the new entrants and successful partnerships were formed.
This process then resulted in the second metamorphic change within this industry – the entry of larger lending institutions such as Lehman Brothers.
Power to change
Since the regulation of insurance products associated with secured loans, I think large institutions have found a more solid base to start the proposition from. However, I do think they have the power to change the market and, more importantly, change it such that it would be almost unrecognisable compared to where it was in 2004.
There has been much debate within these institutions about the difficulties they encounter between regulated and unregulated contracts in secured lending. They dislike the charging of large early repayment charges (ERCs) on unregulated contracts and only one month’s interest on regulated. The problem for mainstream lenders is their fear of the Financial Services Authority (FSA) and the bad publicity associated with excessive ERCs.
I believe these new lenders will be bold enough to remove penalties on all products and open up a more competitive field. This will bring with it additional problems, with brokers looking to churn their clients. For this reason, I think we will see clawbacks on broker commissions becoming commonplace in 2007.
These two changes alone have the ability to dramatically change the market and offer both opportunity and turmoil to brokers who are operating in this sector.
Sudden upsurge
The sudden upsurge of the secured loan market over the past two years has helped many brokers replace lost revenue from mortgages and also absorb some of the additional costs regulation has brought to their business. A big question here is, are we simply dealing with the same customer, but now just using a different vehicle?
It is important to for any business to expand, but we all know the dangers of diversification.
When advising a client to take a secured loan, it is important the advice given is as robust and well founded as any mortgage advice offered to the same client. If you view secured lending as a means to a ‘quick fix’ for a client who needs cash, then you could be in for a shock.
It offers a solution to a problem, but if that solution is based on speed rather than sound financial advice, just how long do you think you can keep that client?
The above example would work well in the area of ERCs, given that the secured loan can avoid the client having to clear these payments. In this scenario it can also provide further business to the adviser once the ERCs have been cleared, as the adviser can then look to consolidate the secured loan into a new mortgage.
It is unlikely that your client will want to keep the secured facility running alongside his main mortgage for the term of the loan and it is most likely that it will be more cost-effective to consolidate into a new mortgage account. In this event you will have most likely sold the client the original mortgage (with ERCs), so to have to ask him to clear them will call your advice into question. Your offering of secured lending will be greatly received and your ability to contact your client within the next couple of years to consolidate the debt will be beneficial to both parties. This is where the relationship between secured lending and mortgages works, but imagine the alternative?
The alternative is one that we come across more frequently than I ever expected we would. There are quite a few brokers who have now turned their back on the mortgage market in favour of secured loans. The reasons quoted for this departure range from avoiding the additional cost of mortgage PI insurance to a simple dislike of new compliance regimes. A move away from mortgages to focus solely on secured lending closes down an adviser’s ability to offer full advice in this arena.
The second charge market offers a wide spectrum of versatile products to brokers. It is also a lifeline at times to stop your clients from defaulting on other debt or the main mortgage. Such clients are often inadvertently teetering on the edge of the non-conforming cliff.
Better to offer clients a preventative course of action than allow them to fall into non-conforming and then offer them a higher interest rate remortgages.
The mortgage market has diminished by over 25 per cent in recent months, so we all have to fight harder to retain our sales levels. It is worth remembering that the sensible business retains its market share and looks for new and emerging markets to enhance profits. The secured loan market offers intermediaries a second bite of business from existing client banks and can help to forge strong long lasting relationships.
