Bob's Blog

Paradigm recently held a Mortgage Market Review (MMR) workshop for our members that sought to provide information and clarification about the various proposals which have been outlined by the Financial Services Authority to date. 

We also wanted to place the MMR in the context of what is happening now with the UK economy, the mortgage and housing markets, and in particular, we wanted to tease out the potential implications of all these issues for mortgage intermediaries going forward. 

In what proved a decision of exquisite timing, the event took place the day after the FSA’s third MMR paper on distribution and disclosure was published.

The day provided an interesting series of presentations which focused on the all-consuming change that the mortgage market and all stakeholders are currently experiencing. 

First, we should be clear, Paradigm has nothing against change in the mortgage market, it is absolutely necessary if we are not to make the same mistakes of the past and if we are to forge an industry which is fit for purpose. 

Particularly in financial services change is a constant, however just now it’s the rate of change and the all-encompassing nature of it that are presenting problems. We are not just talking about change from the FSA regarding MMR after all, we must also consider what is likely to be coming from the European Union, plus the huge regulatory change that will eventually see the FSA itself consigned to the regulatory dustbin. 

All this will have a sizeable impact and will put a huge amount of pressure on mortgage intermediaries at a time when it is unclear how the housing and mortgage markets will stand up. 

What we can say is that 2011 is unlikely to present much of a different picture to the last 12 months and clearly a subdued market is not the best time or place to be introducing a series of proposals which, even in what might be described as a more ‘normal market’, would have fundamental and far-reaching consequences for all stakeholders. 

Over the last few weeks we have had the first inkling from the FSA that it acknowledges this fact and, because of this, there has been slippage in the start date for individual authorisation of advisers and presently no firm start date for full MMR implementation. 

Indeed, it has been mentioned in some quarters that the MMR could be ‘lost in transition’ when the new regulatory structure comes into place although given that many employees of the FSA will simply transfer across to the new bodies, this might be wishful thinking. 

There may however be an interesting turn of events whereby a significant number of the proposals outlined in the MMR are already implemented by lenders themselves without the need for formal rules. For example, over the last year or so the provision of self-cert mortgages has effectively been cut to nil while lenders are changing their interest-only mortgage offerings – the RBS Group of lenders being the latest to stop offering the option to first-time buyers.  

Robert Sinclair of AMI voiced his belief that the FSA will not ban interest-only mortgages; however he said this was a two-tier issue – the back book and any forward book.  Moves like the RBS one are clear signals of lenders’ changed stance on their interest-only forward book because of the worries they have about what they have on their back-book and their existing borrowers’ ability to pay their capital. 

Sinclair suggests that new interest-only lending will be very different with a focus on a day one plan on how the capital will be repaid, followed by 2/3/4/5-year check-ups to investigate if the repayment vehicle is performing well enough to cover the capital, and a revisit of the vehicle 10 years before the end of the term. 

This will certainly mean a much more involved (and costly) process for interest-only lenders and one can assume that a number will simply accept that it is too cost and time-intensive to offer such products.

Lender changes now might seem like we have moved off the blocks before the starting pistol has been fired however lenders are looking to get ahead of the game.  They are attempting to make their lending structures as risk-averse as possible and while we might like a more substantial array of mortgage products for borrowers, whatever their circumstances, we have to be realists at present and acknowledge that the funding isn’t available and there is little appetite to offer mortgages to what may be deemed higher-risk borrowers, even if their definition of ‘higher risk’ does not chime with ours. 

Where we all seem to agree is that with a number of the MMR proposals we have a case of regulatory overkill where a more common sense approach would surely be more beneficial. 

Certainly, in the area of fast-track one cannot see the sense in throwing out the baby with the bath water; lenders’ use of fast-track, to our mind, is based on sound principals and the extremely low arrears levels that fast-track loans generate would seem to be testament to this. 

As Justine Gainer of Northern Rock outlined, there is also a worry that the MMR proposal to verify income on all cases will lead to the unintended consequence of an increase in mortgage fraud as borrowers seek to provide income proof.

With the pushback in terms of MMR timings, it does appear that we have more time to debate the proposals, to submit reaction and to lobby the FSA. 

There has also been something of major turn of events in relation to the MMR whereby the Government has pricked up its ears and is taking a far bigger interest in the debate.  It does not want to see a mortgage/housing market subdued further by regulatory intervention and to hear Housing Minister, Grant Shapps, suggest recently that the MMR would have meant he would not have been able to secure a mortgage, could be a truly pivotal moment.

One suspects that this will translate into a slightly more watered-down series of MMR proposals, ones that many lenders may already be operating.  And it could also mean that mortgage intermediaries benefit from the MMR far more than we would have initially anticipated as lenders seek to curb increased costs by sourcing business through the far more cost-effective broker channel. 

However, there is much to come out in the wash and as a distributor we will continue to keep a close eye on the debate and help ensure our members are in the strongest place possible to benefit from the changing mortgage landscape.