This week the Association of Mortgage Intermediaries (AMI) warned that margin compression by lenders was becoming a “serious concern” with “too much money chasing too little return”.
In its quarterly bulletin the trade body cautioned that lenders have been relaxing their criteria, opening up lending to those with previous debt issues and competing for high LTV market share, despite repeated warnings from the Bank of England about “scaling up the risk curve” in recent months.
James McGregor, director of MESA Financial Consultants, warned that the industry was not learning lessons from the financial crisis.
He said: “There is just no challenging the larger banks due to their cost of funding, which ironically de-risks the banks the more lending they do. The FCA should really start to rein them in, but it doesn’t seem to matter as we found out in 2008 the taxpayer will pick up the bill if all goes tits up.”
McGregor added that he did find it concerning, but the job of a broker is to highlight the best financial products for their clients.
“If we were advising on risks banks take, we would be advising clients not to use anyone,” he added.
Lenders may suffer but clients won’t
Andy Wilson, director of Andy Wilson Financial Services, pointed out that brokers need to use their resources to find the best priced deal for a client, adding “If the lenders have got it wrong and sell their wares too cheaply, they will suffer, not our clients”.
He suggested that the pressure must be on the bigger institutional lenders to maintain strong market share for the sake of their share price, and they may be more willing and able to trim margins for a short period.
He continued: “This does not affect so much the smaller building societies who historically do not chase business based on the keenest rates, and who have a much more conservative attitude towards keen pricing, instead relying on niche products and service to fulfil their targets.”
Affordability rules ‘keep a lid’ on loosening
David Hollingworth, director at L&C, said that the increased competition in the market is a good thing for borrowers and brokers alike, noting that borrowers are always interested in getting the best deal they can and brokers are not going to turn down the chance to secure a winning product for their clients.
He added that lenders reacted to the MMR with significantly tighter criteria, but suggested there was always going to be some room to be more flexible on lending.
“However, it’s not in the interest of anyone for the market to loosen underwriting standards to such a degree that there’s a shift back to ever higher lending amounts,” he continued.
“The affordability rules backed by maximum LTI limits should keep a lid on that, and as AMI points out the regulator has been clear that it does not want to see a radical loosening in underwriting standards.”
Race to the bottom
Paul Flavin, managing director of Zing Mortgages, said it had been a “race to the bottom” with rates, noting that the wiser lenders had left the “rate race early in the game”.
He continued: “I would hate to think that, as brokers we now become responsible for checking the financial credibility of a lender prior to making a recommendation. That said, we do seem responsible for most things that go wrong while financial institutions plough on regardless knowing that the public are there to bail them out if it all goes wrong.”