The global credit lot are not a happy bunch at the moment. The jitters which have gripped the American non-conforming sector have decimated portfolios and lenders around the world are looking nervously over their shoulders to ensure this malaise doesn’t affect them.
But while some players have felt the squeeze, often due to global exposure and the way they fund their lending, the UK has not been plunged into the same tailspin as their American counterparts. However, as Michael Coogan, director-general of the Council of Mortgage Lenders (CML), explains, the good times which have dominated the past few years could be set to change.
“I think it has been a very busy time for the whole of the mortgage industry and busier than people would have forecast at the beginning of the year,” he says. “Clearly now, with interest rates going up again, there’s a sign of things slowing down. But we’re going to see an ongoing interest in refinancing as more people come out of two-year fixed rates and look to keep their costs down, rather than to face payment shock.”
The risks are real
This term ‘payment shock’ has become one of the buzz phrases across the market in recent weeks and it is clearly something which is on Coogan’s mind as it crops up regularly in our 40-minute conversation.
“One of the things we have emphasised very strongly is the importance of customers coming out of two-year fixed rates who may face a payment shock. They should know their payments are going up but whether it will be affordable or not and how much shock there will be, will depend on the customer and their circumstances.”
And the risks of payment shock are all too real, emphasised by the recent CML figures on arrears and repossessions. With a 30 per cent increase in the number of people losing their homes in the first half of 2007, compared to the same period in 2006, sensible financial planning will be essential for those coming into a rate environment which may be two percentage points higher. As Coogan is keen to point out, lenders don’t want to take possession, but the ball is very much in the consumer’s court.
“With house price increases at the levels they have been, people have built up equity so their buffers against financial stress are better. For many customers who have financial difficulties, they may be the subject of court proceedings to take possession. They have an answer which is to sell and they can do that voluntarily, while other groups will refinance to the non-conforming sector. But it is important to remind those customers, and intermediaries who are advising those customers, they need to repay their debt so to just put off that day doesn’t necessarily help them in the long term.”
On the front line
The important point for intermediaries is that they are on the front line, helping clients keep their heads above water – especially those who may be inexperienced in financial matters or who have stretched themselves to get on the property ladder. For Coogan, ‘the lender has the direct relationship with the client and has the most direct interest in resolving that problem’, but ‘in some cases, consumers would prefer that debt-counselling role to be done by an adviser, as it provides an independence from the lender which they may find useful’ – especially if they have other debts.
However, Coogan admits he worries that brokers could fall foul of the regulator if they aren’t 100 per cent focused on helping the customer. He says: “The issue is whether this is seen as a selling opportunity by the broker or an opportunity to help the client through conselling? If it is seen as a selling opportunity, they are at risk of falling foul of the regulator’s view on ‘Treating Customers Fairly.”
Client data
Therefore, with the spectre of payment shock hanging over clients, lenders and brokers will have to work together to help home owners avoid the perils of repossession. Coogan is adamant that the dialogue between the two groups must remain open to help create the best solution for the consumer.
But what about the sharing of client data? Many brokers have been vocal in their demands for greater access when it comes to remortgaging clients but, as yet, very few lenders will allow them any information. Wouldn’t this help improve the broker-lender relationship?
“It’s a thorny issue,” admits Coogan. “The question is should the lender help the intermediary to encourage the customer to be switched away? I suppose it’s not intuitive in a commercial market that you give the opportunity for someone to take your customers away from you.”
A fair point, and as Coogan adds: “The customer can release the information just as easily as the lender as they have their annual statements.”
Market churn
But behind this logic is another issue which dominates Coogan’s thinking and is intrinsically linked to those customers who are currently the subject of payment shock concerns – the issue of churn.
The debate over two-year fixes has bubbled under the surface for a while. In such a competitive market, lenders have been fighting for all the business they can, leaving many unable to make a profit on the products they offer. For Coogan, the customer has thrived within this environment and brokers have helped to perpetuate it through the advice they give.
“Consumers going into fixed rates have tended not to want to risk missing out on lower payments by falling interest rates and have therefore been happy to take a short-term view, in many ways driving the view to two-year fixes, rather than five-year or longer. The issue is what happens after two years and whether brokers are prompt at churning or advising again? The answer is they are.”
However, with the prospect of many being hit by payment shock and the level of fees associated with remortgaging going up considerably, will consumers want to continue down the two-year route or are we on the cusp of a change? Coogan believes we are, and it will be the brokers who will have to adapt.
“In terms of churn and stability, are two-year fixes the best structure? Probably not, and we need to find a better way of doing things. If customers start taking a longer-term view, are brokers going to advise it? And if they advise towards five-year products, what does that mean in terms of broker cashflow if they aren’t going back and looking at switching the mortgage as regularly?”
Lender view
So, in Coogan’s eyes, the days of brokers relying on remortgage business could soon be over. But what of the lenders, who too have thrived in a burgeoning market? The uncertainty in the credit markets has already cast unwanted scrutiny on a number of players and should remortgage activity trail off as well, many could find themselves out of the game.
“We’ve seen modest consolidation in the lending market over the last few years and if the cake doesn’t grow to the same degree in the future, or if lenders who have risked entrance into a market don’t achieve what they thought they would in terms of business levels, we might well see some further changes in lender numbers.”
But it’s not just business levels which threaten lenders. European legislation is set to bring a new set of challenges to overcome, including the possibility of a change of regulator.
“We’ve got an agreement in Brussels for a new directive on consumer credit, including a cap on early repayment charges on unsecured and secured loans. That proposal still has to go through the European parliament but may well impact on the consumer credit market in the UK and could, in theory, pose the question whether there should be a change of regulator for consumer credit.”
Another piece of legislation, the European Mortgage White Paper, has been delayed until November, so the possibility of cross-border lending has receded for the foreseeable future. However, Coogan insists a thorough examination of broker markets across Europe must take place before it can be a success.
“One of the most effective ways in creating a single market is to have a vibrant broker market because it is easier to get into a market if you’ve got a distributor. One of the key things that we’d argue should be done before the White Paper is published is the promised study into credit brokers across Europe, which would show the potential benefits of a good intermediary sector in opening up markets.”
All this goes to show the vital role which brokers will play in tomorrow’s market and their importance for the future prosperity of lenders. Coogan admits the future challenges could place strain on the relationship between the two sides, but those that talk to each other will be the winners in such a commercially charged environment.
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