To understand procuration fees it is important to know their background; why they developed and what effect they had on the mortgage market when they were first introduced.
In the 1970s, mortgage demand outstripped supply and the market became unbalanced as a result. Borrowers were queuing up to obtain mortgages and lenders were able to pick and choose who they lent money to. This meant the relationship between the broker and the lender was one-sided, to the extent that when a broker put a case through to a building society ‘ the only lenders in the market at the time ‘ it would take up to half the broker’s endowment commission. The broker was in a catch-22 situation ‘ needing to secure mortgage funds, but having to sacrifice part of their commission in order to do so.
Due to the large demand for mortgages at this stage, lenders did not need to pay the broker to secure mortgage business and had little pressure to offer competitive rates.
This structure remained until the 1980s when the market experienced an influx of centralised lenders and US banks. These companies, such as Bank America, City Bank and Chemical Bank, had plenty of money to lend and the market began to shift as supply began to balance demand. This influx of new lenders meant that building societies were no longer the only force in the UK mortgage market and the 0.5% commission required by them gradually disappeared.
With supply beginning to balance demand, the industry saw the end of mortgage queues and the introduction of new types of lending such as fixed rates and self-certification. New lenders, in order to establish themselves in the mortgage market and to make sure they had a steady supply of borrowers, started to pay procuration fees. At this stage a flat fee of £100 was usual.
With more money entering the market and supply beginning to outstrip demand the market experienced a recession. This affected both borrowers and lenders. Borrowers were faced with properties in negative equity and lenders struggled to compete with the new lenders in the market.
As the market recovered post- recession, competition intensified with lenders offering increasingly competitive rates and products. Margins in prime business became non existent ‘ new customers were loss leaders for the first years of the mortgage and, in addition, procuration fees became commonplace ‘ thus increasing lenders’ costs even more.
Path of the cause
Since this period, fees have been an accepted, although often controversial, part of the mortgage market. Now, for many brokers, fees are becoming increasingly important as income from other sources continue to fall, such as reduced endowment sales. With the added workload from compliance and comprehensive product selection, brokers are spending more time on processing cases and it is important that fees reflect this. More and more brokers are focusing on mortgage-related products to enhance their income including accident, sickness and unemployment cover (ASU) and term assurance.
So, what is the state of play with procuration fees at present? There has been, without doubt, a huge turnaround in the prime market over the last 20 years. Most lenders now pay fees, usually around £150-£250, and some pay a percentage of the advance. This gradual development and increasing competitiveness in the market means that lenders are now finding they have no option but to pay fees.
The non-standard market, such as self-cert, buy to let, flexible and light adverse, which consists mainly of the new breed of centralised lenders, usually pay fees of around 0.5% of the loan by virtue of the higher margins achieved in this business.
At the top end of the scale is the sub-prime or non-conforming market. This is almost 100% intermediary focused and markets products with positive margins. The lenders, which are often new entrants into the market, have no baggage and offer deep discounts in order to fight competition and as such, can offer brokers on average a 1% procuration fee.
A fair fee
It is important we have a sensible fee scale that adequately reflects a broker’s time and effort they put into a case and this is a level many prime lenders have yet to reach.
On average, a broker takes 10 hours to progress a case from initial marketing through to completion. For a broker whose time is charged at £70-£80 an hour, this would require a fee of £700-800 to reflect this investment of time. On an average mortgage of £75,000, this equates to a fee of around 1%.
If sub-prime lenders are already paying these fees, what does and what should the future hold for the rest of the industry? In a recent survey, a range of packagers were asked if they felt procuration fees were at an appropriate level for brokers. While the overall majority believed they were appropriate for those in the non-standard and sub-prime sector, only 35% felt fees were at an appropriate level in the prime market.
Competitive pressures in the prime market has meant lenders continue to cut margins to offer the best deal to new borrowers. Unfortunately, this competition has meant procuration fees while growing, have not kept pace with the increasing requirements on brokers. Prime lenders have not deliberately failed to increase fee payments, but because of the slim (and in many cases negative) margins they are unable to do so. The pendulum has swung too far in the customer’s favour and it is time the relationship between lender, broker and borrower becomes more balanced. If and when this rebalancing happens, the increase is likely to be slow because lenders continue to be restricted by the negative margins on their products.
It looks like we are in for another round of the great procuration fee debate, but in this instance focusing on what brokers are paid. This figure needs to be a true reflection of what brokers deserve which means prime lenders may need to start evaluating the weighting they give to the individuals that make their business work, for example borrowers and brokers.
Whatever happens in the long term, brokers who are experiencing reducing mortgage income need to make changes to ensure their long-term survival. This involves making more of the markets that pay adequate fees such as non-standard and sub-prime.
10% of all households are sub-prime which is a significant market for brokers to tap into. Brokers can also use mortgage applications to take advantage of ancillary sales including ASU and term assurance which are more profitable for the broker. Finally, brokers may consider the benefits of moving to fee driven advice in order to secure income from clients.
All of these options are worth considering in an attempt to bolster income, while the industry waits for the prime market to change and evolve the way it competes with other lenders in order to pay brokers a realistic procuration fee.