How mortgage broking has changed post credit crunch

by Mark Alexander

12:06 PM, 19th November 2013
About 5 years ago

How mortgage broking has changed post credit crunch

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How mortgage broking has changed post credit crunch

The role of the mortgage broker has changed significantly post credit crunch.

During the buy to let boom years of 1996 to 2008 most buy to let borrowers were primarily focussed on getting deals done quickly. They knew that if they spent time with a financial adviser to complete a full review of their financial circumstances there was a significant risk of being gazumped. Having found a deal, particularly via a developer, they were generally given no more than 28 days to exchange contracts. These purchasers needed to obtain a decision in principle from a lender, instruct solicitors and get a valuation instructed very quickly to avoid losing out. Internet broking was the answer to this and borrowers would generally visit the web to find the most attractive mortgage deals. Many of these borrowers would pay a premium fee to brokers to get things done quickly for them. The larger the broker, the quicker an offer letter could be obtained. This is because many of the larger brokers had sophisticated online systems to process mortgage applications. They were also commissioned by mortgage lenders to “package” deals which included arranging valuations and credit scoring credit scoring. Some brokers were so sophisticated that they could obtain a decision in principle and instruct a valuation, which would be paid for on a credit card, within hours. They would also complete mortgage application forms over the telephone for borrowers and email them to their clients for them to check, sign and return along with any supporting documentation required by lenders. The very largest brokerages even had underwriters employed by mortgage lenders working in their offices to improve efficiency and hence speed of transactions. Advice was pretty much none existent. Brokers would provide guidance to their clients on whether a proposal would match a lenders criteria and they may have suggested alternative products to consider but that’s about as far as it went. Fees charged by brokers were for arranging mortgages, NOT for advice. Broking was incredibly lucrative in those days as the entire focus of the industry was speed and price. Mortgage lenders were competing at every level to secure business from these brokers and paid generous procuration fees (commissions) and they also paid additional fees for the work they were outsourcing to brokers, these fees were called packaging fees. An additional element of brokers for packagers was a mark up on valuation fees. It was normal for lenders to charge an application fee to borrowers which included the cost of employing a surveyor to value a property plus an element of mark up to cover their processing costs. This meant that even if an application failed the costs of processing were covered. When packaging was outsourced to brokers they benefited from this additional income source.  How mortgage broking has changed post credit crunch

Financial advisers did exist during the boom years and some mortgage brokers did arrange mortgages in the boom times on an “advised” basis. However, these brokers were few and far between at the time as demand was driven by speed, not advice. We all thought we knew better in those days and even if we suspected we might not, taking advice which would inevitably slow down the process was considered by many to be a business risk.

The tables really begin to turn in 2008. Many of the buy to let lenders withdrew from the mortgage market completely, some have never returned. Those which withdrew included Paragon Mortgages, Mortgage Express, CHL Capital Homeloans, Edeus, GMAC and Irish Permanent to name but a few. During the boom years there were in excess of 4,000 buy to let mortgage products available at any one time. At the low point the figure was less than 200.

The few lenders which remained in the market tightened up their business models in every conceivable way. LTV’s were reduced, exposure limits were re-set (i.e. maximum number of loans per borrower), fees and interest rates were increased. Brokers also had a very tough time, especially packagers, as the gravy train was very quickly de-railed for them too. Packaging contracts were cancelled which hit two of their income streams immediately, i.e. packaging fees and the profit margins on application fees. Lenders also didn’t need to compete for business so they slashed procuration fees too. At one point, funding was so tight for lenders that their biggest fear was an appearance in the best buy tables on mortgage sourcing systems and in consumer magazines. If they exceeded their lending targets they would be in big trouble, the inevitable consequences was sharp increases in the pricing of mortgage products. Only now, five years after the event are we beginning to see a reversal in this pricing trend.

The lack of availability of mortgage finance has significantly impaired the UK housing market in the last five years as we all know. Numbers of transactions have fallen sharply and press commentary such as Buy to Let booming and increasing by significant levels can best be described as “lies, damn lies and stats”. The reality is that the level of new mortgages being granted and the availability of mortgage products are still massively below what they were in the boom years. The statistics may well show that mortgage availability has improved year on year since the low points of 2010 but that’s certainly not the full story.

Why you need a mortgage adviserAll change – computer says no!

Since the virtual collapse of mortgage packaging the role of brokers offering advice has become increasingly popular. With LTV’s having fallen and the reduction of mortgage product availability it has become much more difficult to pick an off-the-shelf mortgage solution. It is now very difficult for a borrower to find a perfect solution to their requirements via the internet, more often than not, a holistic view of all finances is required. For example, at one time it was possible to purchase a buy to let property with only a 10% deposit. These days that is not possible but that doesn’t mean that a deal cannot be done. An adviser will look at the full picture and may be able to structure a deal by recommending the restructuring of existing finance to raise the extra capital to do the next deal. Such an adviser will also be able to comment on the viability of doing such a deal based on having a complete understanding of a clients finances.

The pressure is off

Given that mortgage lenders are far more diligent and are not constantly stretching themselves to achieve target they are in no rush either. In some cases the pressure to exchange contract quickly is much less. That’s not to say that bargains don’t appear and need to be snapped up quickly though. For this reason, the need for landlords to plan their funding and strategies in advance is ever more apparent. Only an adviser can help landlords to do this. A packager or a broker who doesn’t provide advice is only interested when you have a deal which is good to go. They will not sit down with you to plan a strategy and put funding in place ready for when you find your next bargain.

Conclusion

Non-advised mortgage brokers were right for most people in the boom years where speed was arguably the most important consideration, refinancing was an easy exit route if a mistake was made and property values were soaring which also masked any mistakes.

Mortgage broking today is far more akin to what it was before 1996. Borrowers need to plan in advance and take professional advice.

Borrowers who used the non-advised services of mortgage packagers in the boom times have no recourse to brokers for bad advice because none was given.

In the current market we recommend working with “whole of market” brokers who offer insured and specialist advice based on a full fact find. If you are borrowing for business purposes we also recommend that you check to ensure the broker you are dealing with is a member of the NACFB (National Association of Commercial Finance Brokers) and that their Professional Indemnity Insurance policy is current. Buy to let mortgage sand commercial finance  remain unregulated so anybody can theoretically arrange a mortgage for you and charge you a fee and take commission. You might even be able to arrange mortgages yourself via the internet of directly with a lender but we don’t recommend it. DIY might save you money in the short term but when it comes to something as important as your financial welfare do you really trust yourself not to make the typical DIY mistakes and end up with a “bodge job”?

Maybe the tables will turn again at some point? Maybe we will witness another sustained period of booming property values? Maybe there will be 4,000 buy to let mortgage products to choose from again? Maybe competition amongst lenders will become so strong we will see 90% LTV deals with no fees and interest rates below 1%, brokers with in house underwriters and a trend amongst lenders to outsource their mortgage processing to packagers? Until we do though, best we take professional advice in my opinion.



Comments

Mick Roberts

12:53 PM, 19th November 2013
About 5 years ago

Good reading, I've had a quick draft & yes those were the days. I han't had to take a mortgage since 2008, but I have heard nowadays, I'd be not in great position as I have got a load of houses & am considered a risk, whereas them days, some only wanted u if u had more than 4 etc.
I can remember approx. 1999, ask me another day I may say 1997, the Loughborough manager, yes he would ring u, say yeah send form no problem, I'd be thinking 'He han't even asked for wage proof, rent etc.' But 2 days later offer on table.
I'd buy houses for 45k, spend 2k doing up, 5-7 days later, I'd have mortgage offer for maybe 50k, all my money back when I wanted it.
They was chucking it at us, wan't they! I wouldn't like to start again now, thinking of paying al me mortgages off as time goes on, but then a bit of me says 'hold some in reserve in case need funds again & can't get mortgage'

Howard Reuben CeMap CeRER

9:24 AM, 20th November 2013
About 5 years ago

Hi Mark

Spot on ..... and also how it's all about to change yet again within the next 6 months.....

FAO of all people who are about to apply for a mortgage;

Help Required!!!!!!!!!! Yes, help yourself, to help us Brokers, to help your lender to help you!

Change is inevitable, please note that from 26th April 2014 the next raft of changes is going to be implemented with a whole new regulatory regime (brought in by the FCA / PRA to all lenders - resi, BTL or otherwise). This impending legislation is known as the Mortgage Market Review (yes, we're all about to get MMR'd) and even closer scrutiny of 'affordability' will be carried out in a much more forensic manner.

At least 3 months bank statements will need to be provided, the entries on the bank statements will be much closer looked at to determine the borrowers lifestyle, there will be much closer cross-referencing between HMRC and the submitted accounts / payslips and ... guess what? .... not all lenders are geared up for the changes yet so there has been talk that there may be some slow down of funds and lending early next year as they get themselves ready with new systems etc.

At a recent industry expo, a leading lender declared that they themselves will be ready but they know that many other lenders won't be. At this same seminar presentation, they also said that the MMR rules absolutely start on 26th April. When the FSA was introduced on October 31st 2004 (I remember that day well) all lenders and Brokers had 6 months transition to get things 'right'. Not this time. It starts on 26/4/14.

If employed, lenders like to see that you're not in a probationary period, so may need to wait a month or so before applying. If knowingly being made redundant, or if about to go on maternity leave, this must all be disclosed too.

If self employed, know that the lenders look at your net profit (not turnover) and try and make sure that it is the same or possibly higher than previous years. Lenders like to see an increase year on year before they consider providing you with the best mortgage products/ rates.

Obtain a copy of your credit files – either Experian and/ or Equifax to ensure that you have a clean credit history. It costs about £2. If there are mistakes on the records, these can be requested to be removed ... and this would be essential to secure best 'prime' rates

On the same note, if there are any missed payments showing, or defaults or arrears or CCJ's or bankruptcies, these need to be satisfied asap too. Lenders will want full explanations of why they occurred

Do NOT use 'wonga' style payday loans - some mortgage lenders are now declining applications when they see these entries on the bank statements

Ensure you are all on the electoral roll where you currently reside.

Increase savings to pay deposit and to cover purchase costs, Stamp Duty, solicitors fees etc

So, dear readers, please help yourself to help us Brokers to help the lenders to help you! We have been providing mortgage advice since 4th January 1993 (coming up to our 21st birthday) and so we have the experienced team of Advisers and Brokers in-house to help and assist and guide you through the current times and future changes.

Take note of the requirements in the checklist above and a fully packaged application has a substantially greater chance of getting through first time.

Hope this helps!

9:20 AM, 23rd November 2013
About 5 years ago

Very helpful comment from both Mark and Rueben.

I think a mortgage broker is such a valuable part of any investor's team. Their role is often under-rated imho.

I have always worked with brokers who are also landlord/investors themselves, as I think it really helps that they have a deeper level of understanding and are aware of all the different products and the way they can be used to the landlord's advantage.

Banks like Shawbrook entering the market means that human underwriting is being used and people's individual circumstances are being taken into account.

In my interview with Shawbrook's Commercial M.D., it was clear that Shawbrook were looking to create long term relationships with landlords and to have a human review each application on its own merits:

http://www.propertytribes.com/pt-tv-interview-with-shawbrook-bank-stephen-johnson-t-9288.html

With Aldermore set to enter the bridging market next year, I can see that the challenger banks are going to provide some competitive alternatives and shake up the status quo a little bit. Bring it on!

Neil Patterson

9:56 AM, 23rd November 2013
About 5 years ago

Reply to the comment left by "Vanessa Warwick" at "23/11/2013 - 09:20":

I totally agree Vanessa, but then I probably would lol as I started what I saw as the nicest job in the bank being a mortgage adviser in 1992.

You actually get to do something for people that they really want 🙂

I have been involved around the mortgage market ever since in various roles for my sins, but have always gravitated around helping people.

What I have gained comes from having seen thousands of successful purchases and what goes wrong not just now but over many years. What works now may not work in years to come.

Also understanding how peoples lives and circumstances change over time, which is often something they don't think of with rose tinted short term glasses.

Therefore it is just as important what you don't let people do as what you can help them with. Even if it is technically possible to do something now doesn't mean it is a good idea for the future, so you have to be prepared to tell people you wouldn't do it, so you are not going to help them to do it.

That often comes as bit of a shock, but you know what they nearly always come back 🙂

10:00 AM, 23rd November 2013
About 5 years ago

Well said Neil.

Apologies to Howard - the first line of my above post should read ...

Mark and Howard ...

Doh!!

Should not post before coffee consumption!!

Neil Patterson

10:12 AM, 23rd November 2013
About 5 years ago

Reply to the comment left by "Vanessa Warwick" at "23/11/2013 - 10:00":

I think Howard has got immune to that by now lol 🙂

Oh and by the way I forgot to mention I was 4 years old in 1992 !! if you believe that.

10:15 AM, 23rd November 2013
About 5 years ago

Property keeps you young!!

Mick Roberts

8:28 AM, 24th November 2013
About 5 years ago

Reply to the comment left by "Vanessa Warwick" at "23/11/2013 - 10:15":

Property keeps me ruddy old. Must be my wrong way of only accepting HB tenants ha ha. I looked younger when I was buying & selling cars. Or is that maybe because I was younger?


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