Star Letter 25/04/14
Each week, we also round-up the best comments, emails and lettersto the site and pick one reader contribution as our Star Letter. This week’s award goes to:
Ask the Experts: Will MMR cause mass application declines?
It might not be the FCA’s intention for there to be more applications declined, but almost certainly, there will be. One point missed in this article is the number of potential applicants who will be put off applying.
As usual the cretins of Canary Wharf ignore the fact that many hardworking potential homeowners who would make sacrifices in order to buy their first home will be barred from doing so because the overpaid and out of touch regulators deem it unsafe for them to be trusted to deal with their finances.
Meanwhile, rents will increase and the short term financial hardships that those of us of a certain age went through for our first houses will no longer be allowed. Pathetic isn’t it?
MMR: what it means for your business
The Mortgage Market Review (MMR) is imminent and the industry as a whole seems largely prepared for the new regulations. Despite this, there are still concerns among many mortgage advisers that the MMR will cause a significant increase in administrative burdens.
The main change under the MMR is that the majority of mortgage sales will need to be advised, with supporting documentation to provide audit trails and evidence transparency.
Assessing client affordability
Although the onus will ultimately be on the lender to approve affordability, they will be increasingly reliant on mortgage advisers to carry out detailed scenario planning and ‘rate shock’ tests to illustrate that a client is suitable for a specific product. Mortgage advisers will need to be fully up-to-date with lenders’ requirements to ensure that the mortgage application they submit is appropriate.
This requirement not only means that mortgage advisers need to be aware of their clients’ personal and financial circumstances, but it also requires an understanding of the current economic climate and the effect of increasing mortgage rates. While this activity is already carried out by most mortgage advisers, they will now need to provide detailed documentation to demonstrate this.
Advisers need to have adequate affordability measures in place and make sure they take into account the borrower’s net income, including any committed expenditure and the impact that a rise in interest rates may have on their mortgage repayments.
Advisers will also need to carry out detailed forward planning with clients and discuss any possible lifestyle changes that could affect affordability. Lender criteria are also susceptible to change, so advisers need to stay informed about any amendments that arise which may affect a borrower’s mortgage application.
Technology and processes
The MMR will bring about a period of adjustment and lenders and mortgage advisers will need to find the best ways of working within this new dynamic. Having the right technology in place will be hugely important in facilitating this process.
It will also streamline many admin based tasks that advisers have to comply with, allowing them to focus on what they do best: providing the best possible support for their clients, instead of diverting their time to administrative processes.
Increased time spent with clients could generate new business leads and also help to ensure that advisers are getting all the information they need from applicants.
This is likely to be well received by lenders who may begin to scrutinise the quality of mortgage advisers’ business more carefully post the MMR. Quality of applications could even be reflected in the procuration fees that firms are paid, with substandard forms receiving lower fees.
With the appropriate technology, mortgage advisers can be confident that their cases will be submitted in the right format and in a timely manner. This will be more important than ever given that an adviser’s efficiency will have a direct impact on their revenue stream and profitability.
Advisers will also need to be fully transparent and provide proof of exactly what information and documents were collated during the advice process.
The MMR will require an increased level of transparency from mortgage advisers, and the challenge will be to find a cost and time effective way to meet the new regulatory requirements.
For mortgage advisers willing to adopt these new ways of working, administrative time and cost can be significantly reduced, meaning that although the MMR will increase regulation it also has the potential to increase profitability.
Standing up for the mortgage misfits after MMR – Ipswich BS
Being a financial ‘misfit’ could soon raise new problems. Post-MMR many people could find themselves becoming ‘mortgage misfits’ as a result of requirements of the Mortgage Market Review.
The new rules are designed to protect consumers and prevent the excessive lending by some lenders of pre-2008, which is vital.
However, it’s possible that some individuals, even those with a good credit history, may not pass the new affordability process. So what do these ‘mortgage misfits’ look like?
What worries me is that ‘misfits’ could be very ordinary people. Our testing has identified that those on incomes under £25,000 p.a, the self-employed, and small business owners could be damaged by the new criteria. It’s largely assumptions about these borrowers’ spending that could deny them a mortgage.
For example, take a family of two adults and two children on an income of £25,000. Under the old system, they might have been eligible for 3.5 times their salary – giving them access to up to £87,500. Under the new rules, using average expenditure data, we see them as likely to be rejected for loans of £70,000-£90,000.
This is the result of automated assessments – a calculation of ability to pay based on the expenditure of an ‘average’ borrower, and not the customers’ true financial picture. A lender could make assumptions about the applicants’ energy bills, food shopping and even what they spend on clothes. In fact, this family are careful spenders with outgoings significantly below national averages. So what then?
An ordinary income coupled with sensible spending shouldn’t be a barrier to home ownership.
I want to declare our support for these mortgage misfits. Our focus is on manual underwriting and taking the individual’s full circumstances into account. This includes accepting customer-certified evidence of their expenditure. Some larger lenders may not do this, if that’s not their model. I would urge misfit borrowers (or their brokers) to find a lender that does.
Paul Winter is chief executive of Ipswich Building Society
Kensington launches new affordability calculator
The Mortgage market Review-compliant calculator gives full consideration to an applicant’s outgoings as well as income, providing an illustrative figure for intermediaries before they carry out a full credit search as part of the Decision in Principle.
Kensington launched its new application portal, featuring document uploads, online fee payment, improved case tracking and streamlined process and visuals yesterday.
Alex Hammond, head of marketing and communications at Kensington, (pictured) said: “We know how important it is for brokers to be able to get a quick understanding of how much their clients could borrow. It factors in different sources of income and outgoings before calculating a figure and while it is not a commitment to lend, we believe it is the most accurate pre-login affordability calculator we have ever built.
“But there is still plenty more to come from Kensington, and we are looking forward to making another exciting announcement next week.”
For the new affordability calculator, click HERE.
Incoming regulation will let down mortgage ‘misfits’
Small business owner and those with unusual income types like pensions, equity in a business or property could fail automated lending assessments, said Paul Winter CEO Ipswich Building Society.
Winter said: “It is entirely appropriate that the FCA wishes to introduce regulation to ensure the lending excesses of pre-2008 are not repeated and that irresponsible lending is firmly tackled.
“However, I am concerned that people on average incomes may now find it harder to obtain a mortgage and I believe this may prove to be an unintended consequence of the methods used to implement affordability requirements.”
In an example, Winter said a family of two adults and two children wishing to purchase a property for £125,000, with a household income of £30,000 and with a 10% deposit, would not meet a computer’s affordability model.
Winter said: “The Government needs to address housing supply issues rather than potentially limiting those on average incomes from obtaining a mortgage. Many aspirational home owners are facing a double lock: unavailable lending and a lack of homes to choose from.”
Ipswich Building Society has also launched an affordability calculator.
Ask the Experts: Will MMR cause mass application declines?
Q: I’ve heard significantly different answers from various sources on the issue of ‘mass declines’ of mortgage applications post-MMR.
I can’t imagine it was the FCA’s intention to create rules that meant huge numbers of potential borrowers were declined however it seems that lenders think there might be a chance of this?
A: It appears there are some mixed messages emanating from the industry on this topic. At our recent mortgage and protection round table the representatives from the FCA were very confident that the industry would not be dealing with ‘mass declines’ post-MMR and suggested that the lenders they had spoken to felt the same way.
However I have seen some recent data from the Bank of England’s credit conditions survey that appears to show that lenders expect the number of declines to increase.
It does seem inevitable that some people who might have secured mortgage finance pre-MMR are not going to get through the tighter affordability constraints in the new environment.
But the answer to how many will fall into this bracket is anyone’s guess at present.
I doubt it will reach the ‘mass’ stage but brokers certainly need to prepare their clients regarding the new rules and outline why criteria has been tightened, what this might mean for their chances of securing a mortgage, and how the process will perhaps be different, be more involved and be lengthier.
This will be especially relevant for those who have gone through the mortgage process pre-MMR.
The proof of the pudding will be in the eating on this one and we will all be keeping a watching brief on how lenders trade under the new rules.
The MMR is here, but at what cost? – Toni Smith
The MMR has required a vast amount of resource to be diverted for up to a year now but particularly in the last six months. Lenders have had to make a huge investment in IT in some cases, while networks have had to revisit fact finds and train every broker in their network as well as increasing the amount of communication issued often many times over.
Thinking about it across the whole life cycle of the mortgage there have been changes to IDDs, fact finds, sourcing software, training and events put on with the associated costs of hiring locations, producing manuals and validating exams, as well as the immense cost of taking both brokers and BDMs off the road and away from their clients while they have undergone training.
Many brokers have had to bring in more administration staff to deal with the increased amount of documentation required while in the case of lenders there has been the cost of retraining their entire customer facing mortgage staff – with the result at the moment that some lenders can no longer offer face-to-face mortgage advice in their branches.
I am not convinced that budgets and targets will be reduced to allow for this. Most firms across the industry still need to bring in the same amount of revenue, especially in a rising market, so where will the costs be recovered from?
Will the costs be written down in firms’ accounts as a one-off cost? Will it result in more aggressive pricing to increase lender volumes or prices going up to increase margins or will the costs be recouped by a reduction in staff numbers and lowering head count?
While the aim of the MMR is to put the borrower’s interests at the heart of lending, we cannot forget the cost of one of the biggest shake ups our industry has ever seen.
Toni Smith is sales operations director at First Complete
FCA: Walking away from a sale may be in customers’ best interest
Under the new rules the non-advised sales route has been removed which allowed consumers, including those with no knowledge of financial products, to choose their own mortgage product.
Under the MMR borrowers who do not wish to take advice can choose the execution-only route which cannot involve human interaction.
But this leaves a question mark over what brokers should do if a customer rejects their advice.
FCA director of mortgages and consumer lending Linda Woodall said despite having interaction with an adviser if the customer rejects advice the sale can become execution only.
But the broker can choose not to offer this option.
“Even if the customer decides not to take advice following the interview the broker still has an over-arching responsibility to act in the customer’s best interests if they feel the product the customer is selecting is not the most suitable,” she said.
Brokers must explain to customers that by going against the advice of the broker they will be giving up their rights to complain to the Financial Ombudsman Service should they be dissatisfied with the mortgage.
If the sale continues down the execution-only route the customer must explain in writing that they have chosen to ignore the advice given and have selected their own mortgage product.
If the broker decides to terminate the interview following the rejection of advice this must be explained in a file note and kept with the customer’s notes.
Trade bodies issue updated MMR broker guidelines
The three trade bodies have produced an updated guide for lenders and intermediaries which outlines the ways the industry must work together in the best interests of the customers.
This includes the responsibilities brokers have to deliver quality advice and appropriate recommendations.
The trade bodies say the document can be used by firms to decide if any action needs to be taken to bring them in line with the MMR rules.
The guide covers all pre-sale aspects including advertising and other literature, point of sale responsibilities including product recommendations and documentation and post-sale support.
Key points for brokers when recommending a product include:
– Are the customer’s requirements within the lender’s known eligibility criteria?
– Should the customer have an interest-only mortgage, a repayment mortgage or a combination of the two?
– Should the customer take out the mortgage for a particular term?
– Does the customer need stability in the monthly payments, bearing in mind the impact on the customer of significant interest rate changes in the future?
– Is it appropriate for the customer to have their payments minimised at the outset?
– Is it appropriate for the customer to make early repayments?
– Is it appropriate for the customer to have any other features of a mortgage?
– Is the mortgage appropriate based on the information provided by the customer on his credit history?
– Is it appropriate for the customer to pay any fees and charges up front, rather than adding them to the mortgage?
Paul Smee, director-general at the Council of Mortgage Lenders, said: “The new regulation of mortgages that takes place at the end of April will bring significant change to the industry and this updated guide will be a useful benchmark for implementing the new rules for both lenders and intermediaries.
“This collaborative approach in working jointly with the IMLA and AMI demonstrates the effectiveness of joint engagement in driving good practice within the industry to deliver good outcomes for customers.”
Peter Williams, executive director at IMLA, said: “The guide seeks to provide a simple way through what is an ever more complex system. The proof of its success will be in helping ensure this new more strongly advised and evidenced based system delivers the high quality customer outcomes we all desire.”
The full guide can be viewed on the CML website HERE.
FCA to allow industry ‘period of MMR adjustment’ before compliance checks
In a press briefing ahead of the formal implementation date on 26 April, Linda Woodall said it would take time for firms to get used to the more detailed advice interview but that it was to be expected.
She said: “We expect that processes which are new in the implementation phase, particularly where it involves human beings giving advice, may be slower to start off with and then the whole process will get slicker as time goes on.”
Borrower interview times are expected to take two and half hours in some cases but the FCA said some of the more established larger lenders, which have been operating the MMR rules for some time, would execute the interviews quicker than others.
In a Mortgage Solutions report, brokers said they were concerned that during this ‘period of adjustment’ lenders would assess affordability more strictly until they got used to the rules which could lead to consumers not being treated fairly.
Woodall said that the FCA would be considering the customer experience during this time and would be contacting firms and could obtain copies of records if it thought this would be necessary to protect consumers.
“We have always said that anyone who can afford a mortgage should be able to get one,” she said.
But Charles Haresnape, managing director of residential mortgages at Aldermore, said he still thinks there will be borrowers which should have been accepted by high street lenders which will be declined under the more stringent incoming rules.
He said: “Post-MMR there will be a period of adjustment. Some lenders will have tighter affordability measures than before and will restrict volume using their processes while they adapt but I think this will be a short-term measure.”
But Haresnape does think longer term there will be some credit worthy borrowers which will no longer fit with a high street lender.
“I see this as an opportunity,” Haresnape said. “Challenger banks and more specialised lenders which are used to using manual procedures will be able to help these borrowers.”
Despite the disruption the regulator does not expect there to be a significant decline in mortgage lending as a result of the Mortgage Market Review but it expects the new rules to take some of the “froth” out of the market.
Work on the parameters of the post-implementation testing are currently under way.