FSA Mortgage Sector Conference - 14.05.2009

Author: Simon Whittaker Posted on: 14 May 2009

An interesting day out at the Mortgage Sector Conference on Tuesday – and here are some of the highlights (and lowlights!).

The day started with a blizzard of statistics from Lord Turner (Chairman of FSA) – the upshot of which was that he does not necessarily accept all of the popular received wisdom about the mortgage market problems and how to solve them.  Most importantly he stated that there is no rush to change the regulatory structure as lenders are being ultra cautious at present and the next boom and bust crisis should be some time away.  We have to hope that the Government allows him to stand by this judgement rather than do something now just to be seen to be doing something.

It was also a pity that he was too busy to stay for the rest of the day.

The representative from the Council of Mortgage Lenders appeared to believe that the lending system had worked fine (with the exception of just a few irresponsible lenders that are no longer with us) and to the extent that anything had gone wrong it was the fault of (smaller) intermediaries who had forced the pace on commission payment structures and dubious product design.  Needless to say this was forcefully rejected by Chris Cummings of the Association of Mortgage Intermediaries who said that it was laughable to suggest that intermediaries were responsible for designing high risk lending products and practices that have caused some lenders so many problems.

Whilst there was considerable agreement about the need to “strengthen” lending practices there were some fairly predictable fault lines between delegates representing the differing interest groups (regulators, consumers, lenders and intermediaries). 

Some of the issues discussed were:

• Extent to which regulation is required to protect the system as a whole and economic stability.

• Lessons that can be learned from differing regulatory environments overseas – e.g. mandatory restriction on LTV and LTI.  There did not appear to be much enthusiasm for this.

• Regulation of second charge lending – if there are to be mandatory LTI/LTV limits then this is a natural corollary.  There were also brief mentions about potential regulation of Buy to Let mortgages – but this did not appear to be top of the agenda.

• Need for higher regulatory capital and liquidity hurdles for higher risk lending products – and whether this is an adequate way of directing lenders away from riskier products.  Or should certain types of lending (e.g. self cert mortgages – particularly for employed people who should be able to prove earnings) be banned.

• Did the proliferation of thousands of different mortgage products that were available in 2007 act in the public interest – or was there too much choice leading to confusion.

• The impact of securitisation and whole loan book sales on lending practices and arrears management.

• Should some of the outcomes of the Retail Distribution Review for investment products be carried over into the mortgage sector.  In particular should brokers be paid by way of client fees rather than lender commissions (at present this is just up for discussion and there did not appear to be too much backing for the concept – although there was a suggestion that procuration fees should be capped to avoid the excessive fees that were paid on sub-prime mortgages).

• The lack of competition in the current market with just six or seven major lenders active and the negative impact of lenders disintermediation of brokers through adopting dual pricing.

• Whether the “non balance sheet” lenders can be brought back into the market to stimulate competition. 

There was an impassioned plea from Tony Ward of Home Funding for some help for “the lenders who have been left out in the cold” – having had no Government bail-outs they are still unable to raise funds with the wholesale funding markets still closed.  These lenders have served to create the most innovative mortgage market in the world and helped to support finance for sectors previously ignored by the mainstream lenders.  To date Treasury efforts to stimulate new wholesale funding have been largely ineffectual – will Quantitative Easing deliver a new wholesale funding market?

• What is going to happen in 2011/2012 when lenders will have to re-finance £450Bn they have borrowed from the Government – will there be another funding crisis?

• The role of brokers in the mortgage process.

This last point is one that I would like to expand upon.  It appears to me that there was an unrealistic level of expectation of what the intermediaries can/should be doing.

• It was agreed that there needed to be a clear distinction between “advised” and “non-advised” sales.

• Consumer groups expect brokers to delve deep into a client’s financial circumstances and advise on the desirability of taking on the level of debt being sought by the client rather than just affordability.  This needs to be done no matter how small the loan and thus also the potential reward for the broker and at the end of the process the advice may be that the client is not a suitable person for financial products.

• Clients want the broker to raise finance irrespective of perceived desirability of the proposed level of debt.

• Lenders expect brokers not just to “pre-qualify” lending applications – if CML is to be believed they seem to expect brokers to eliminate all bad lending by identifying potential fraud and over-borrowing (i.e. to accept responsibility for underwriting the quality of the loans introduced).

• All of this on top of Anti Money Laundering rules which require the broker to duplicate checks on the client that will also be performed by the lender and their solicitors.

• There was however a concensus that the consumer needs to be better informed – and whilst nobody suggested a return to “caveat emptor” there was general acceptance by all parties of their need to improve customer understanding of financial products and thus to improve the quality of client decision making.

A few other observations:

• FSA encouraged lenders to share information about dodgy brokers – but brokers aren’t allowed access this information – nor can they access the “National Hunter” database that is used by banks to identify dodgy borrowers.  This must restrict brokers’ and network principals’ responsibility for weeding out fraud in the industry.

• FSA appeared to acknowledge that the current IDD/Key Facts system are not working well and will need to be simplified as consumers are failing to make rational choices based on them – there is too much emphasis on the short term cash flow cost.  In private discussions with a representative of FSA outside of the meeting I expressed my concerns about being forced to mislead clients by quoting a totally meaningless APR figure – whilst initially surprised, she understood the point being made – and maybe we will see a change at some time in the future.

At one point John Malone of Premier Mortgage Service was moved to say that he had “heard so much today that made me want to scream ............. or slash my wrists” and that the FSA was using intermediaries as the “whipping boys” for the industry as a whole.  It wasn’t really that bad – but ultimately the proof will be in the proposals that emerge from the consultation process that is currently taking place within the FSA and the extent to which the FSA listens to all of the interested parties.

Author: Simon Whittaker