In the financial markets everyone is looking for the ‘next big thing’ - whether that be a share that is likely to rocket or an early understanding of where the economy might be heading in order to take advantage.
Questions asked at the moment include: Are we in the UK destined for a double-dip recession? How will the Euro crisis eventually unfold? Will inflation continue to fall? Is BoE Base Rate likely to stay at 0.5% for the entire year and beyond? Where will house prices be come the end of 2012?
All these questions are difficult to answer; yes we can take an educated guess and every one of us does, every single day, perhaps without even knowing it. Having a view on what might be about to happen is human nature and a core part of the sector we work in.
We may only be two months into this year but already we can begin to see how the next 10 months might unfold and, particularly in the mortgage and lending landscapes, there are some themes already developing.
For one, I can categorically state that 2012 will not be the year when we see lending levels suddenly sky rocket. All the recent trade body predictions point to overall lending being about the same as 2011, perhaps even less.
Many lenders may be suggesting that they are going to lend more throughout the year but the reality is that they will simply be looking to take a bigger slice of the same-size pie. The pie is not going to be any bigger this year.
Focus on risk
Already, on the Mortgage Introducer website I have mused upon what may define 2012 for lenders if it is not an increase in lending.
Both I and Tony Ward of Home Funding Ltd have come to the conclusion that lenders are likely to be focused much more on risk; that is making their mortgage books less risky than they have been in recent years.
Very few lenders will view their current mortgage books with 100% pleasure; it’s certainly the case that those who were particularly active pre-credit crunch, in sectors which have now been deemed no-go areas, will be wanting to (shall we say) remove some of the higher risk loans they currently have sat with them.
This is why I believe 2012 is likely to be defined as ‘the year of deleveraging’ – lenders actively using mechanisms such as discount incentives to try and get some of those riskier loans/borrowers to move away.
Of course, there is nothing new about such activity, it has been tried by a number of lenders in the recent past, albeit with limited (if any) success.
There are a number of reasons for this including the fact that the majority of lenders attempting it were home loan operators and deleveraging in this market often has the opposite effect to what was planned. Namely, discount incentives are taken up by those with low LTVs/low risk borrowers who can easily remortgage to other lenders leaving the very borrowers the lender wanted to remove, i.e., high LTV/high risk still on the book. Essentially, the book becomes riskier which is not what was planned.
Other sectors
However, in sectors like buy-to-let, discount incentives for borrowers can work. The higher LTV/riskier borrowers who may be struggling to wash their faces on their current deals often decide to take the discount and sell their property. They are not worried about remortgaging because they have no intention of doing so.
Those lower risk/lower LTV borrowers who are making money and are looking at the long-term for the investment, invariably decide to stay where they are as there is no rush to remortgage – especially if you are on a very nice, long-term, low-rate product. Why would you move? The effect is that the book is deleveraged and is less risky.
Now, this is a rather simplistic look at deleveraging however I would be surprised if we did not see more lenders attempting this type of action.
The problem lies in executing such a plan; very few lenders have the nous or experience and, as stated above, those that have tried previously have often failed. It therefore makes sense to use a third-party operator to systematically run the deleveraging project.
Analysis
For a start you will need to identify those borrowers you want to make the offer too – this is not a plan which requires a scattergun approach – and you will need a quality call centre to make the approaches and sound out the borrower. You may also want to hire an operator who can help the borrower dispose of their property if this is the route they wish to go down.
Certainly, Tony Ward has a carried out a lot of analytical work in this field and garnered an impressive insight into the shape of future portfolio make-up, and the speed and cost of deleveraging.
Brokers and advisers may be wondering where they fit into such a project; after all, if they are unlikely to be writing greater levels of mortgage business this year as a result of subdued appetites to lend, then where can they provide their expertise?
Well, it’s quite simple really. I’m sure there will be a number of deleveraging lenders who would be willing to pay a commission to a broker who was able to help facilitate an exit for their client; plus of course the broker could also advise on any subsequent remortgage (if there is one) and earn a further commission.
Deleverage
The question will truly be how much a lender wants to deleverage and how willing it is to use all methods at its disposal in order to deleverage effectively? I suspect that, given the current state of many mortgage books, lenders will be keen to explore all avenues.
Therefore, while 2012 may officially be the Chinese ‘Year of the Dragon’ I believe that the rest of the year and beyond will see an attempt by lenders to breathe fire into their deleveraging activity. Certainly, the current level of risk they are holding is too high and action will have to be taken.
Using an expert in its field will be key to making this happen and I suspect that brokers and intermediaries will also have a part to play in ‘the great deleverage of 2012’.
