Predictions of a full-blown price war have accompanied the run-up to the launch of edeus – but most industry watchers agree that the battle was pretty much inevitable anyway.
Tony Jones, managing director of Pink Home Loans, points to the entry of new providers as simply speeding things up. “You only have to look at the signs, the bigger picture – a price war was going to happen.”
The entry of technology driven edeus, which launches into the market next week, has sparked fear that other lenders may have to either drop their prices or ramp up their technology to compete.
Jones points out that while gross lending continues to rise, from £287bn in 2005 to a predicted £320bn in 2006, there were other less-than-positive signs for the mortgage market. “Mortgage lending is expected to go up by 10 per cent, but if you look at where we are economically it is not that good.”
For example, explains Jones, a survey carried out last month by the online UK estate agency Rightmove showed a 1.6 per cent drop in property asking prices.
“This maybe seasonal, but if you look at interest rates it doesn’t look so good. They went up in August and it’s expected that they will go up in November too.”
The remainder of 2006 is likely to prove even tougher for lenders. “There’s not going to be a crash, but I expect there will be some contraction in the housing market.”
Too many cooks?
What concerns Jones is that edeus is entering an already crowded specialist mortgage market.
“You only have to look at how many lenders have come in recently,” he explains.
American banks, having jealously viewing the UK’s more specialist mortgage markets, are now ploughing into the UK, heavily.
“Merrill Lynch has bought Mortgages plc and Freedom. Morgan Stanley has launched Advantage Home Loans. Both these banks are big players with lots of money behind them.
“They have long viewed the UK market as one with a huge potential to grow. Now I think there may be others looking to get a share of the action.”
It’s not just large US banks that want their share, says Jones.
“The market is going to get more competitive all round. We have got some of the smaller building societies entering the specialist markets too.”
But Jones expects more societies to follow Stroud & Swindon and the Scarborough BS into the non-conforming market.
Louise Cuming, head of mortgages at moneysupermarket.com, also believes more lenders will have a go at the specialist mortgage market. She says: “This increased choice can only be a positive thing.
Having greater choice surely is healthy for consumers and also for mortgage intermediaries.”
Cuming says advisers she has spoken to are already rubbing their hands with glee at the prospect of a price war.
“Intermediaries certainly welcome the increased choice and competition in the market.”
She adds: “The lenders out there have already set some pretty high standards. There are some top class lenders to compete with. You’ve got Accord Mortgages, Chelsea and Derbyshire Building Societies with a growing involvement in the non-conforming market, and they have been joined by a lender from the big league – Alliance and Leicester.”
Technology
If consumers and intermediaries are benefitting in the battle for their business, which lender is most likely to win the war for business, and who is likely to lose out altogether?
Cuming says the ‘winners’ in the specialist market will not necessarily be those who can sell the cheapest mortgage products.
She says: “The real winners will be those that design the most innovative products. Many of the specialist lenders are already designing products around very strict guidelines and lenders are using sophisticated IT systems to underwrite applications automatically.”
Specialist applications through to lenders such as BM Solutions and GMAC-RFC are processed quickly, based on credit score, with minimum human intervention, she says. “In this way, mortgage lenders mitigate their risk by utilising leading-edge credit score technology to identify the profile of customer and rate the product accordingly.”
This means they can lower their costs by reducing the number of staff required and therefore improve profitability and improve their ability to price at a really competitive rate.
This, claims Cuming, will leave behind smaller players who cannot attract the personnel with the required know-how or those without the resources to implement such systems. She says: “They will not be able to compete in this new type of market.”
Jones agrees that any price war will be great for consumers and advisers but, like Cuming, sees smaller lenders as the victims.
“Lenders are being forced to invest in technology that helps them turn their business around more quickly.”
GMAC-RFC’s launch of an instant mortgage offer service using automated valuations is just the first of many similar innovations, claims Jones. “
GMAC-RFC’s pioneering technology now means a full mortgage offer can be produced in just a matter of minutes.”
The service will be rolled out to all intermediaries and packagers over the next 10 weeks.
“This already makes GMAC-RFC a lender that’s ahead of the pack, now others will have to introduce similar systems if they are to keep up, let alone get ahead,” adds Jones.
Product innovation is key
The same technology that allows lenders to speed up processes will also allow them to introduce more innovative products. If a lender is to stay ahead in the specialist market they now have to offer something even more unique.
Jones says Advantage’s equity share mortgage, Flexishare, which allows borrowers to sacrifice future equity in order to get on the housing ladder, is one such product.
He also points to the Kent Reliance Building Society’s lifetime inter-generational mortgage as another.
He says: “These are products that stand out. You might not agree with a mortgage that can be inherited, but let’s face it, it’s an innovative product and there’s a huge need for it.”
This all leaves smaller lenders at an apparent loss. “Being a specialist lender has got tougher, especially in the non-conforming market where products are getting cheaper, reducing profit margins.
But it is the incoming capital adequacy requirements that may prove the other part of a double whammy that could led to the exit of the smaller specialist lenders.
“Capital adequacy is based on the availability of cash obviously, and smaller lenders are run on a comparative shoe-string compared to most banks. Plus they have lengthy underwriting techniques unlike the big banks that can carry out credit scoring in a matter of hours.”
Unless they do get more technology and product savvy, building societies could find themselves consigned to mortgage-lending history, claims Jones.
But he adds, at the end of the day, it is really the mortgage intermediaries who hold the key to the success of any of the specialist lenders.
“The big American banks rely on intermediaries more than the high-street names. Of course specialist mortgages are, by their nature, sold through intermediaries.”
Rod Murdison, proprietor at Murdison & Browning believes building societies are just as well-placed to sell specialist mortgages as their American cousins. In fact he believes some broker-based specialist lenders may not be up to the job at all.
Murdison says: “Unlike well known lenders, which may have a high-street presence, national advertising, and an existing customer base, the predominantly broker-based lenders can only compete in areas that are easy for clients and brokers to understand."
“The most obvious one is the lowest interest rate commensurate with low fees and no
overhanging redemption penalties. Others are speed of completion, minimal paperwork and such.”
Murdison doesn’t believe the specialist market is big enough to survive the entry of so many specialist lenders into the fray.
“With mainstream lenders now becoming more savvy to the needs of all customers, you have to ask how big the specialist market is.”
Murdison says there are serious limits as to the areas in which they really can compete.
“Assuming the percentage of mortgage intermediaries putting naïve customers with non-conforming lenders for the sake of increased commission is small; there would seem to be limits to the areas in which these lenders can compete.”
“For example, if there are interest rates and levels of profitability below which a lender cannot go, then there would seem to be only two alternatives; diminish the fees paid to brokers and increase the methods of extracting money from customers.”
He says both practices are on the increase in the mainstream market, never mind the
specialist one, and most lenders in the specialist market are simply after a fast buck – a practice that will eventually backfire on them.
“Certain lenders want to have their cake and eat it by offering better rates or fees on mortgages provided by their well known public name and having another company with a name the public has never heard of to try and continue having a presence in and make profit from the broker market.”
He adds: “There has been an increase in the number of lenders who, either through stepped products or ludicrous arrangement fees, try to obtain top position in terms of ranking by lowest interest rate in the various sourcing systems.”
This, he claims enables companies to try and get more business by implying they have the lowest rate whereas if a stepped rate is averaged and/or the fees added, then the true cost of borrowing during the low rate period would move that lender from first to 15th place. Add in various ‘deeds release’ and other associated fees and the lender’s real position falls further – hardly ‘Treating Customers Fairly’ (TCF).”
Clients losing out?
If there are going to be real losers in a price war it will, almost ironically, be those the specialist market aims to cater to.
Cuming says: “I would say those most likely to lose out in this market in the future may well be clients with unusual circumstances, for example, who don’t fit the normal rules.”
She says advisers can do their bit to protect consumers by making a case for lending based on the facts of the individual. Advisers themselves, if they haven’t already, could do more to help clients with specialist needs source the mortgages they need.
“As the mortgage market moves increasingly towards automated underwriting, lenders are taking the view that they prefer not to get involved with these cases that need specialist (and expensive) underwriting skills,” she says.
There are a few who remain skeptical as to the likelihood of such a price war.
Alex Hammond, PR manager at Kensington Mortgages, doesn’t believe there will actually be anything like the carnage predicted by other specialist mortgage experts.
He says: “Market forces state that new entrants into a market will increase competition, lowering prices and driving innovation.”
Hammond believes the specialist mortgage market is already competitive enough and rates have already been driven down to levels comparable with their mainstream lending counterparts.
He says: “So although new entrants will undoubtedly put downward pressure on product rates, prices simply cannot get much lower and a price war is unlikely.
“This means lenders will need to innovate to differentiate themselves from the growing number of competitors, both in the way of products and distribution. This is good news for brokers because lenders will be developing niche products to target their clients with specialist needs, and looking at ways of enhancing their relationship with intermediaries.”
Jeff Knight, director of marketing at GMAC-RFC, believes a price war unlikely but admits it will be the mortgage intermediaries in the market who will benefit most from the entrance of new lenders.
He says: “Developments in the mortgage market, such as new technology and innovation in products can only enhance the mortgage-buying process.”
