As the UK and broader global economy recalibrate in an effort to correct the over extension of previous years, living standards – that have unremittingly risen since the 1950s – are now in a reverse.
The credit that has fuelled decades of western growth is in short supply and nowhere is this more obvious than in the UK mortgage market.
With the creation of mortgage prisoners through falling house prices, negative equity, the withdrawal of interest only, and tighter lending criteria, it’s a tribute to the intermediary industry that it is still writing as much business as it is. It’s clear that, no matter what the economic weather, consumers and the regulator – as the Mortgage Market Review illustrates – understand the value of good advice.
But no matter how supportive consumers and the regulator are, it is a fact that the lenders hold all the cards for the foreseeable future while funding remains as scarce as it is. More downgrades, break-ups, and mis-selling scandals will add to the current capital pressures.
Amidst the carnage of the credit crunch, the simple fact remains that the collapse in mortgage lending has been accompanied by a collapse in intermediary numbers. Fewer intermediaries mean less available advice and reduced distribution power.
But the end of the broking model has been predicted more times than I care to remember. Despite some evidence to the contrary, most lenders do like the intermediary route to market. It offers access to the market in bite size chunks and access to niches that would be otherwise uneconomical. These segments, such as the self-employed, will grow with more confidence and funding.
However, the rise of the mortgage intermediary channel has traditionally been underpinned by product diversity meaning brokers can more readily add value to borrowers by searching the market and providing tailored information on the mortgage products available. In addition, as the big players continue to struggle with balance sheet issues, smaller lenders who need national coverage for current or new products often retain no branch networks. They rely on intermediaries to distribute products and find consumers.
What has changed for the foreseeable future is lenders’ appetite for vanilla, volume business and what they are prepared to pay for it. There has been a significant flight to quality and the focus of risk management on the quality of business is here to stay. It will cause bigger distributors to focus again on their service support propositions, as negotiating volume driven market-leading product rates is no longer what lenders require. Indeed we will see more lenders seeking to address imbalances in their procuration fees to reflect the quality of the business submitted.
So brokers will retain similar choices going forward. While the network route will continue to exist for businesses that require systems, controls and procedures, larger DAs who manage their own commercial and regulatory risk will continue to thrive with the support of networks and mortgage clubs with specific DA propositions. However, pressure on lenders from the FSA to ‘know your broker’ means that the value chain is unlikely to support small DA firms going forward.
The intermediary model will survive but will it thrive? Ultimately, the liquidity issues facing everyone are bigger than our industry. The deleveraging that everyone is undergoing, which, with the exception of London, includes house prices, and a low interest rate policy mean we are unlikely to experience a boom in conventional terms any time soon. However, demographic changes, such as an ageing population, mean that other drivers for selling property or releasing equity will grow nonetheless over the coming years.
This underlines a broader point and reason for confidence going forward. Housing remains the number one asset for everyone in the UK and as such good advice should always be available to consumers.
