Kensington became the latest lender to re-think its strategy last week when it announced that it would be pulling out of the non-conforming sector until market conditions improve.
The move is the latest in a long line of re-thinking, re-structuring, withdrawing and redundancies in the mortgage market. So what exactly is going on?
Kensington says the strategy shift is a result of the recent further tightening in the global capital markets and says it intends to increase its focus on lower risk products.
Non-conforming products were withdrawn at the close of business on 23 November while prime fixed rate products were also withdrawn for re-pricing and a new range was introduced on 26 November.
It is not the first time Kensington has reacted to the credit crunch; in September it introduced a 75 per cent loan-to-value (LTV) cap on its adverse range in direct response to the lack of investor appetite.
With demand from investors for adverse credit or high LTV portfolios showing no sign of returning in the next few months, it has taken the decision to put its adverse range ‘on ice’ and revamp its prime range until the investor market returns.
Kensington is obviously re-evaluating its position in the market and re-thinking its strategy, and Nicola Severn, head of public relations at lender edeus, says that in the current climate, all lenders will be taking a prudent approach to lending.
“In the current climate, there will be a number of lender casualties but those with an experienced management team, who have priced for risk and who have strong relationships with third party investors will be best placed to emerge stronger when the recovery begins,” Severn says. “Pulling out of a sector completely sends mixed messages to brokers. Lenders who are able to stand firm and support their intermediaries through this period will emerge with the most solid broker relationships.”
Melanie Bien, director at Savills Private Finance, says Kensington’s withdrawal from the non-conforming market is a direct result of the credit crunch. “There is simply no appetite to offload non-conforming loans in the wholesale market so Kensington is not going to offer non-conforming mortgages for the time being and concentrate on prime products instead,” she explains.
Job losses
While no one in the industry wants to hear of redundancies, the current climate has made such developments unavoidable for many lenders. The announcement from Kensington about its product range came after several weeks of redundancies and high profile resignations across lenders, networks and packagers alike.
At the beginning of November edeus, Kensington and Mortgages plc announced a total of 160 staff cuts as a result of the continuing liquidity crisis.
At edeus, around 10 business development managers (BDMs) faced the axe with other redundancies falling among the lender’s call centre staff. Jim Robinson, packaging manager at edeus, was one of the more high profile names packing up his desk.
“The turbulence in the money markets has had a knock-on effect in terms of volume and asset sale, and as such lenders have revised their volume forecasts for 2008 and need to adjust their resources accordingly,” says Severn. “The priority for lenders is survival, and in many cases this will mean cost base adjustments. We do, however, expect the market to recover in 2008 and it is hoped that the worst of the redundancies are now over.”
Around the same time, and following parent Merrill Lynch’s net loss of $2.3bn (£1.1bn) in Q3, Mortgages plc culled 65 positions – representing 20 per cent of its workforce – and Kensington announced a 20 per cent cut in staff numbers with 65 positions axed, including all its onsite underwriters.
Kensington’s PR manager, Alex Hammond, says redundancies are happening across all roles throughout the industry as businesses adapt to the new environment and develop leaner operating models ready for the return of the capital markets next year. He said there will be – and has been – some casualties in the BDM community.
“Indeed, in this time of change, good communication between lenders and their intermediaries is more important than ever,” he says. “As all lenders need to react to market conditions we are seeing more frequent product changes.
"These can be communicated via e-mail or through the press, but many intermediaries like to talk to someone who can go through individual cases and answer their questions.
"If a lender can provide clear, decisive communication with intermediaries in the way that they prefer, then it gives intermediaries confidence when they recommend a product from that lender and this is where BDMs can provide real value at the moment.”
Shown the door
Also shown the door in the past month were five non-franchise advisers at the Mortgage Advice Bureau’s Derby adviser centre, and 62 staff at the Mortgage Trust’s Epsom office.
All processing for new business across the Paragon Mortgages and Mortgage Trust brands is to be centralised at Paragon’s head office in the West Midlands.
Paragon also suffered a dramatic drop in share price last week and the buy-to-let specialist revealed it might have to carry out an emergency rights issue because of funding problems in the current market.
Experts said the company could be targeted for takeover by rivals after its share price fell by more than 80 per cent from the year high. It says that it is not for sale but, as it is a listed company, it would have to consider any offer.
Staff at Wave were also told they were at risk of redundancy and Victoria Mortgages gave 50 staff the chop when it failed to find a buyer.
In October, GMAC-RFC slashed up to 30 per cent of its workforce and closed down its subsidiary division High Street Home Loans (HSHL) in a massive operational shake-up. About 200 redundancies were made at GMAC-RFC, with a further 66 at HSHL. However unlike other mortgage lenders, it has not reduced its sales force.
“We see maintaining relationships with our customers as key, in the short term and longer term too. In a fast changing market, our sales team remain integral in keeping brokers and packagers up-to-date with changes at GMAC-RFC and the market as a whole,” says GMAC-RFC director of marketing, Jeff Knight.
“More forms of communication are forming today, particularly online, yet the good old-fashioned form of conversation still remains as important as it has ever been.
“Many of our competitors have been short-sighted in this, particularly when they invested in technology; at GMAC-RFC we always know how important it is to not be faceless and we know that many brokers are disappointed that their lenders sales teams are not making contact.”
Network and packager pain
Networks and packagers have been feeling the pinch too. Recently, Justine Tomlinson revealed she is leaving Mortgage Next, with Gemma Harle to become sole managing director. The firm has also revealed that it is to make 15 per cent of its packaging department redundant after a third of its non-conforming business dropped off in the past two months.
Around the same time, All Types of Mortgages confirmed that it has entered into redundancy talks with staff, saying that as the current adverse market conditions are likely to continue into 2008 it is taking prudent decisions with respect to staff numbers. Packagers Praxis, c2 Group and MD Nationwide all also announced redundancies in the past few weeks.
Rob Jupp, managing director at Personal Touch Packaging, says almost every single lender in the market has been affected by the present market conditions and hearing of more redundancies within packagers and intermediaries is a sign that it is becoming more widespread.
“While changes in criteria and rates at short notice are now commonplace, they are certainly challenging for all concerned,” he says. “Every business within the industry has had to look at their business models and re-structure accordingly. Redundancy does not constitute a poor business, it reflects a business that is looking at the future and planning for the long term. Redundancies at any time are unpleasant, even more so during this time of year with the Christmas season upon us.”
There have also been a number of high-profile resignations recently, including Linda Will, managing director of Accord Mortgages, and Patrick Gale, chief executive of Sesame, who have both announced they are stepping down.
In the US, both Stan O’Neal, the chairman and chief executive of Merrill Lynch, which owns both Mortgages plc and Wave; and Charles Prince, the head of Citigroup, resigned.
Pain before improvement
Other lenders have effectively priced themselves out of the non-conforming market by raising rates and reducing maximum LTVs. “These are tough times for the non-conforming market with lenders re-assessing their business models. There will be quite a lot of pain before the situation improves and liquidity returns to the market,” says Bien.
Indeed a survey by GE Money Home Lending found that 87 per cent of mortgage deals currently being handled by UK mortgage brokers have suffered due to lenders changing product rates or criteria at short notice. Almost one in five brokers claim deals are not being honoured after a decision-in-principle.
Examples of lenders that have recently re-priced or reviewed criteria include GMAC-RFC, which has reduced its maximum LTV for non-conforming cases to 80 per cent and pulled out of heavy adverse altogether. Also Mortgages plc withdrew its medium adverse products at the end of October.
Bien’s prediction of tougher times ahead is backed up by Jonathan Cornell, managing director at Hamptons International Mortgages. He says the specialist market is going through a significant period of turmoil and brokers are seeing specialist lenders re-pricing frequently and restricting their criteria on an almost weekly basis.
“When one changes, the rest normally follow so they don’t start to see too much business. Any firm operating mainly in the specialist sector is going to have to look at redundancies,” he says. “I think the next six months will be a tough period, but once the credit markets open back up normality will return.”
Sands are still shifting
Undoubtedly the mortgage market will look very different in the future than what we have experienced in the past. At present, the sands are still shifting and the winners will be those with progressive and flexible strategies.
We have seen an increase in the cost of mortgage funding across the board and although the securitisation market is expected to return next year, it is still currently inactive. As a result, mortgage rates have been pushed up. This re-pricing activity is essentially a market price correction. As the liquidity crisis has hit, mortgage lenders have looked to increase risk pricing.
“In addition to risk pricing, we have also seen mortgage lenders move away from certain areas of the market, especially the heavy or high LTV end,” says Severn. “This will lead to a downturn in availability in certain sectors and, combined with the price increases, some borrowers will find it more difficult to secure the mortgage they require. As such we expect a downturn in business volumes across the specialist market.
The liquidity crisis will not only have an affect on the specialist sector, it will also impact on prime, and we have already seen a number of mainstream mortgage lenders re-price upwards. This is because all lenders have a degree of exposure and reliance on the money markets, and as the cost of borrowing increases, these increases will be passed on to borrowers.
“However as more mortgage lenders experience a ‘flight to quality’ there will be increased competition in the prime sector and this combined with expected Base Rate reductions may ease the situation for mainstream borrowers,” says Severn. “In effect, the gap between mainstream and specialist rates is likely to widen to represent the associated risk.”
Jupp, for one, is confident about the future and remains positive that this market will eventually return to the force it once was not so long ago. “The future is extremely hard to predict and I would love to have a crystal ball to view the unknown,” he says.
“It has been said by many, including myself, that this time will see the survival of the fittest. Prudent decisions, workforce re-modelling and innovative strategies are the order of the day. As to whether all those actions will ensure survival remains to be seen.”
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