We know that 2006 is going to prove to be very competitive. There are more lenders entering the marketplace, lending growth has stabilised and margins have never been keener. We all live in interesting times, to paraphrase the Chinese. For certain there are signs of buoyancy but we must not lose sight of the underlying market. We will have a stable lending environment and, at the same time, in niche areas such as buy-to-let, self-certification and non-conforming, a larger than ever number of lenders competing for their share of the cake. So what will be the outcome of this?
Market insight
I predict that the new entrants – and especially the large new entrants – will find it hard to make much headway in non-prime areas of the market, already well serviced by existing players. I am particularly thinking of buy-to-let, self-certification and non-conforming, which the prime lenders increasingly have their eyes on.
The well-established players within these sectors have always been those who have the market insight and can think outside the box by revising the shape of mortgage niches. It is these lenders who originally came up with the concepts of buy-to-let, let-to-buy, self-certification and multiple-occupancy lending. And it is these same lenders who will continue to lead the field. They have the people, the market know-how, the knowledge and the systems to move the game on.
Prime lenders will increasingly be venturing into what is, for them, alien territory. They have no track record or experience in these areas. For example, in buy-to-let, they will not have the insight to appreciate how vulnerable some budding landlords may be and how much lending prudence is required.
Lenders, such as Capital Home Loans, who have been in buy-to-let for many years, make sure they lend to individuals with the right provenance. They are likely to be semi-professional landlords and have a record of property acquisition and successful management. Such lenders are able to keep their arrears low.
Lending to individuals who are likely not to even make much of a rental yield is not the right, or professional, way to approach things.
Service delivery
You have to wonder about service delivery as well. The large new entrants have not got the trained underwriters in these lending areas and are often expert at cutting standards in the name of saving money.
I still do not know how my personal bank, one of the big four clearing banks, gets away with channelling all its customer calls through an ‘offshore’ call centre. It is impossible to call my branch and I have to speak to someone half way round the world who, no doubt, then sends an email to the customer centre back in the UK. I can’t imagine that going down very well with financial advisers. There’s no point in offering very low headline interest rates when you come up against service levels that would make any intermediary tear their hair out.
Large lenders telling brokers that they will not cross-sell and will respect intermediaries’ client bases does not quite ring true. Banks have invested millions in cross-selling infrastructure, so they are not going to stop doing it just because they say they are.
The parable of the scorpion and the frog springs to mind. The one about both needing to cross a river, with the frog offering to take the scorpion on its back if it does not sting it. Halfway across, the frog gets stung and asks the scorpion why. The scorpion replies that it could not help it, it was in its nature.
You can understand the large lenders’ predicament; there is next to no profit left in prime, so they are forced to cross-sell. Let us all hope they do not use this model in the specialist niches.
Opportunities to shine
Despite such challenging market conditions, I am very upbeat about the coming year. I see 2006 and 2007 as providing opportunities to shine to those lenders able ‘to step up to the plate’, as the Americans might say. My free advice to lenders is high service delivery of products that differentiate them from the pack will be critical ingredients for success. Great products mean nothing if you don’t satisfy customers’ needs. There are many lenders who talk a lot about service, but not many capable of delivering it.
My advice to brokers is simple. Be careful you don’t get stung.
Bob Young is managing director of Capital Home Loans
