Predicting possible developments in the mortgage market during 2003 seems, on first analysis, to be a fairly straightforward exercise.
For once, most leading economists appear to be in broad agreement on the key economic indicators. So interest rates should nudge upwards to between 4.5% and 4.75% by the year-end, inflation should be broadly in-line with the Government’s target of 2.5%, and overall the continued global economic weakness could give rise to a small increase in unemployment in the UK during 2003.
From a housing market perspective, the Council of Mortgage Lenders’ (CML) view appears to be a slower rate of house price inflation at about 7% with mortgage lending growing from around £215bn in 2002 to £225bn in 2003 (from £162bn in 2001). The bad news is that mortgage arrears and repossessions, which have fallen for a decade or more, are expected to rise, but not sharply.
So is this the forecasting done and dusted for another 12 months?
Well, perhaps not. The more difficult predictions this year may not be the economic ones, but those concerned with the balance of power which exists in the mortgage distribution chain.
Lenders, insurers, networks, packagers and brokers are all inevitably considering their options ahead of the new statutory regulated mortgage market in 2004 and we will see some organisations make their moves as 2003 unfolds.
It is not rocket science to point out that the requirement for mortgage brokers to hold mortgage qualifications and the eventual statutory regulation of the mortgage market in the final quarter of 2004, are both going to have a profound effect on the structure of the market.
We now know the number of mortgage brokers holding professional qualifications and how many appear to have opted to provide information only or throw in the towel altogether.
What we do not know, because it will take several months for a clear picture to emerge, is precisely how brokers have changed their modus operandi as a result.
Who will give advice?
For unqualified brokers who don’t wish to pass the exams, the options (other than forgetting all about mortgages and changing career) are to provide information only, or let someone else provide mortgage advice to their clients on their behalf.
However, the information-only route does not sound a satisfactory long-term solution. Not only does it prevent a broker from doing what brokers do best ‘ selling products ‘ but it is a minefield of restrictive clauses.
In reality it is difficult to see how a broker can give a client information only without the client saying ‘what do you recommend?’ or ‘how does this product compare with others in the market?’ A mere blink of the eye in response to these questions could be enough to ensure a broker is issued with their first red card.
An educated guess would be that many brokers will do deals with organisations to gain access to staff who are qualified to give consumers mortgage advice. It means brokers will not lose their client relationships just because they cannot source mortgages, and they will still earn some income as a result of the recommendation.
What will be interesting to see is how these brokers decide to replace the lost income from mortgage sales particularly because we are seeing a decline in pensions and investments. Some will inevitably have been IFAs who dealt with the occasional mortgage case, so they will simply focus on their bread and butter investment business.
Business as usual?
For those brokers who have qualified, it is not unreasonable to assume their philosophy will be ‘business as usual.’ Well, perhaps not. Any broker who has taken the time and trouble to sit and pass an exam must have given thought to the way in which they will sell their services in the future.
One possible outcome is that, although we will end up with a smaller number of mortgage brokers, they will be more focused, more professional and better organised than the ‘band of brothers’ that existed before. As a result, the volume of business generated by intermediaries is not expected to fall significantly as a result of reducing numbers. If anything volumes generated by intermediaries could actually increase, as those who remain in the market become more focused on the task in hand. This in turn will create better brokers and increase consumer confidence in this area.
The professional mortgage intermediary of 2003 and beyond is inevitably going to spend more time and money on technology, training, fostering good working relationships with product providers and ensuring their clients get a good service. They should also be working on developing customer retention techniques and marketing to ensure they are remembered by customers. One obvious way to do this will be to join forces with other like-minded individuals and share the costs, which could give rise to a new breed of ‘super brokers’.
Alternatively, they may subscribe to a network that can provide all-encompassing mortgage sales support in the future. There is little doubt that we will see networks grow in popularity, but it will be interesting to see if it is the traditional mortgage networks that make the gains, or if some IFA networks become more attractive to mortgage brokers.
Whatever happens to brokers it looks increasingly likely the number of packagers will reduce. During the past few years a number of brokers have jumped on the packaging bandwagon, but the market cannot sustain the large number of small packagers which currently exist. As sub-prime and niche lenders review their packager agreements, it seems inevitable the number of packagers each lender has formal arrangements with will decrease rather than increase.
Friends in high places
So what of the lenders and their relationships with mortgage intermediaries? It is no secret that distribution is key for lenders, hence their on-going involvement with intermediaries. Consequently, lenders will be doing everything they can to ensure they remain in favour with brokers, which inevitably means further product development, ever more aggressive product pricing and a focus on service, with potential developments in partnership marketing with brokers.
From a service perspective, the ability of lenders to accept and process electronic mortgage applications will become more important, as it speeds up the approval process and enables both brokers and lenders to secure their client’s business. To this end it has been suggested we will not end up with a single common trading platform ‘ or even that it would be desirable ‘ but we will see further big investments in technology and electronic trading and processing (such as more electronic decisions in principle).
Another interesting area to watch will be product development. The danger with this is that, in the drive by lenders to differentiate their products, they achieve this simply by tweaking criteria or ‘bolting on’ a few additional features. The end result will be further proliferation of what is already an extensive list of products available. It is hoped lenders will invest more ‘quality time and effort’ into product development and devise products which satisfy real customer needs.
A few last predictions for 2003 will be to watch the developments with equity release and lifetime mortgages (those that run for over 25 years) as they are expected to take off next year, and those who get involved sooner rather than later will drive the market.
And despite media reports, it is likely buy to let will remain healthy and self-certification mortgages will continue to grow in 2003.
The key predictions for the mortgage market in 2003 that will change the balance of power are fewer qualified mortgage brokers, but a more professional, committed attitude from those who are left, possibly resulting in the emergence of groups of ‘super brokers’ who join forces to benefit from economies of scale.
Those brokers who remain unqualified will have to forge alliances with networks and packagers, who can write mortgage business on their behalf. This will add to the influence of networks, that can provide product sourcing, training, compliance and processing support. And finally this fragmented market will grow organically through mergers and acquisitions.
As with all predictions in life, some will be right, some wrong and some just a bit off target. The only thing to do now is to place your bets as to which will be on target and which will fall wide of the mark.
Paul Howard is sales and development director at Sun Bank