If December’s headlines are anything to go by 2003 could be an interesting, if not slightly traumatic year, for the housing market.
Looking back over the last 12 months it could be said ‘redemption penalties’ became the dirty words of the lending industry. Ironic, then, that one of the biggest issues facing lenders last year was perhaps one of the most reluctantly talked about.
Sub-prime lenders would argue they have been dealing with a high redemption environment for years; it is a market used to 25% turnover and up to 35% has not been unheard of.
However, while it is currently prime lenders who are feeling the pinch, sub-prime lenders must take heed and protect their own mortgage books from any increase in churning.
It is too easy for lenders to point the finger at brokers for churning business, rather than taking responsibility for the problems facing the industry now. In a way, it is a monster of the industry’s own making; the products offered to borrowers over the last few years have been tailor-made for increased redemption penalties.
As more prime lenders enter the sub-prime market looking for margins, they are making the same mistakes as in the prime market ‘ introducing short-term products with low rates and smaller penalties. Established sub-prime lenders must ensure they do not have a knee-jerk reaction to these new entrants and fall into the same trap.
So what is in store for 2003? As a downturn in the market is about the only thing that will reduce redemption penalties, it is likely they will remain high. Because while economists may be predicting the housing market is set for anything but a happy new year, this may be slightly pess-imistic. It would be unrealisitc to expect the same growth in 2003 as last year. And where it may have slowed down in some areas, especially London and the South East, it will take time to filter through to the rest of the UK.
Like it or not, the industry is going to have to face facts ‘ redemption penalties will continue to be a problem.
It may be the start of a new year, but the housing market will not change overnight. In an ideal world, lenders in the sub-prime and prime markets will stop exacerbating the problem with unprofitable short-term products. They will stop blaming brokers for churning and brokers will stop encouraging borrowers to move mortgage every two years. If not, hopefully sub-prime lenders will take responsibility for ensuring, in a bid to remain competitive, they do not fall into the same traps.
Gordon Jolly is managing director of Amber Homeloans