It is said that he who understands the past controls the future. If that is the case, what can we learn from the last mortgage downturn in order to help us through the current situation?
Analysing the experience of certain key figures 20 years ago might give advisers valuable insights into the market we find ourselves in today.
David Tweedy believes the experience for the end borrower has been nowhere near as challenging as it was in the last downturn – so far. He said: “Last time – about 1988/1989 – the base rate doubled in a few months. It is hard to imagine that happening again, or the subsequent rise in unemployment and repossessions that followed it.”
But he thinks the situation for lenders is worse this time around. In the late 1980s, lack of access to funds caused many lenders, mainly foreign banks, to close down or change their model – Platform has had three different models in its time – but those that were left were not in as much difficulty as they are today.
He said: “There were a lot of US banks with UK subsidiaries in late 1980s, and by 1992/1993 it was very expensive to access the securitisation markets. Many pulled out or became servicers,which is happening now. Easier access to funding did start to come back by 1995/1996, and it brought with it product innovation.
“Then, as again now, balance sheet funding was key. But in the future, interbank funding, warehouse funding and securitisation will all return. The difference was in the last recession, we saw product development in order to protect borrowers’ interest payments, but then we were able to securitise.”
Tweedy contends that despite this we will not go back to a situation like that of 15 years ago, when product choice and criteria were much more basic, believing lessons have been learnt. He said: “Those who survive this downturn will be the ones who are less reliant on wholesale funds and whose criteria remain more prudent.
“These lenders understand that when conditions improve there will be great opportunities. The market will be very competitive, but to compete profitably it is crucial we invest in the future to avoid the mistakes of the past. We all need the ability to increase volumes without hitting service problems like we did in the recent past.
“The market will come back. It is an important driver for the economy, and when it does innovation around funding will start again.”
So what are lenders doing now to prevent a replay of the last market downturn? Tweedy said we have come a long way in terms of processes, which means lenders can access borrowers who slip into difficulties faster. He said: “We have better data about customers and a more sophisticated approach towards dealing with arrears. We have the technology to identify problems before people can get into real trouble.
“In 1988/1989, when borrowers went into arrears, we had to try and deal with it though a mixture of printouts and a Rolodex. Now we have got sophisticated programmes and predictive diallers, which means that everyone in the chain is much faster to react and mitigate against loss.”
But how reliant on technology can we become? Is this not partly what got the global markets into these problems? Tweedy agrees in part, for while there was more reliance on physical underwriting and pooled insurance products in the 1980s, there is now more of a reliance on AVMs and credit scores. He says: “I believe the credit score is vital but does not obviate the need for human interaction; to physically look at the file, and this will have to continue to be a part.”
Platform’s customers are both the end borrower and the brokers, and the effect of market conditions on the end borrower has not been as bad as it has been for advisers. So what will happen here?
Tweedy notes that the sector has changed dramatically since the last downturn, and will have to continue to evolve to keep up with market conditions. He said: “In the late 1980s, a lot of brokers worked for life companies, but in the 1990s we saw the rise of the independent adviser. The broker sector went through a realignment. Then, like now, there was a search for new income streams, for value added services and advice.
“A big change was the move from pure commission to more paid-for advice. Now we are seeing a move in the remuneration strategy again; there will still be procuration fees when we come out of this, but there will be more fees paid for the advice given by the broker to the borrower.”
Tweedy points to the Retail Distribution Review as evidence of a ‘raising of the bar’ to giving advice, resulting in the need for more qualifications, better oversight and continuous training. While it may not be popular, Tweedy notes that increased regulation means directly authorised firms and even smaller networks are finding it more expensive. He said: “We are inevitably going to see growth in the larger networks. Lenders are going to be cautious; they will need good contacts and will be looking for a few partners of choice.” n
David Tweedy is managing director of Platform
