The past year has proved to be a challenging one for the mortgage industry and it will be remembered as the first full year in which businesses operated under the rules set by the Financial Services Authority (FSA). But with attention now firmly shifting to the impending introduction of Home Information Packs (HIPs) into the marketplace, the Council of Mortgage Lenders’ (CML) annual report brings into focus the industry as it currently stands.
While 2005 was a year for the industry to become more confident working in a regulated environment, the next 12 months will see the FSA assessing whether it actually benefits consumers. Richard Sexton, business development director for E.surv, comments: “By and large, the industry has now absorbed the requirements of mortgage regulation. It has not been a wholly positive experience, but the industry is now over the hump and regulation is now just part of day-to-day business.”
Regulatory effects
The report revealed how regulation affected the market. A CML survey in February revealed that, as a result of regulation, a typical customer interview had increased by 30 minutes from the already lengthy standard of two hours. With 41 per cent of mainstream business based on advice to customers, the CML argued longer interviews could deter some customers from seeking advice, and so undermine one of the key objectives of regulation. But the trade body hopes, as procedures become more familiar to staff, the process will become increasingly streamlined.
However, the CML proved accurate in its warning that lenders, particularly smaller ones, would lose business if the intermediaries they usually worked with chose to become appointed representatives (ARs), rather than directly authorised (DA) by the FSA. The survey revealed 31 per cent of lenders had lost business and 28 per cent said that the loss was signficant. Despite this, 83 per cent were able to replace lost business from another source.
But with gross lending reaching new monthly records towards the end of the year, Sexton points out that the industry can be optimistic about the market over the next six months. He says: “Lenders are very keen to maintain and grow their market share. They have been quite satisfied by business coming through recently. Lenders are more interested in profitable niche markets. There is more risk, but bigger profits.”
HIPs challenges
Yet, the next year is all about the introduction of HIPs and the large amount of work yet to be done to make the packs a reality. Both lenders and providers are trying to assess the likely impact on the industry and what the introduction of the packs will mean for home-buyers. While the government agreed to delay the introduction of HIPs until June 2007, it rejected the CML’s advice that the quiet Winter season would be the best time for implementation as it is likely to cause less disruption. The date chosen remains challenging to the entire industry and there is a real risk that it will be slipped further.
Sexton agrees that the timetable is a worry. “There are still areas of concern to be resolved and there are some weird and wonderful things that need to be ironed out,” he says. “Certainly a later start would be a logical thing to do. Why do it at a very busy time? The CML view is very sensible. Lenders are still trying to sort out their stance on HIPs, as it’s difficult for them financially to market HIPs and make them add up.”
Shared ownership
October 2006 will see the shared equity scheme launched by the government and lenders as part of the Labour Party’s plans to expand home ownership to 75 per cent of the population. The government had planned to offer more than 20,000 open market Homebuy equity loans between 2005 and 2010, but, with lenders now part-funding the scheme, the number could rise to 40,000. Although the scheme is relatively small in scale, it will give the industry real experience of running a public/private support scheme for first-time buyers (FTBs), which is likely to encourage more mortgage lenders to participate.
Sexton is optimistic about the potential for shared equity. He says: “At launch, it won’t have a huge impact, but the property market needs an alternative way of generating FTBs. It won’t do much on day one, but if the government gets behind it and doesn’t just pay lip service to it, shared equity could be one of the fundamental building blocks of the housing market in the future.”
But while FTBs decline as house price growth continues to outstrip earnings, the CML is continuing its call for a more systematic approach to homeownership. Property taxation and regulatory costs continue to limit the choices of some homebuyers. The raising of the stamp duty threshold to £120,000 provided help for fewer than half of first-time buyers in 2005 and the CML believes there is now an overwhelming need for the government to reform stamp duty.
But even with these other issues facing the industry, HIPs will be fundamental to the market over the coming year.
