Sunday, 14 February 2016

Mortgage Market Review - Another Little Gem from the Financial Catastrophe Authority

Following on from a comment on another MW post, I thought you might like a little bit of enlightenment on how the FCA decided to intervene in the mortgage market post the 2008 banking crisis.  The FCA sets out why, what and how, here.

First, some background.

My personal experience of providing mortgage advice (and I mean 'advice', not sales) goes back to the early 1980's. The bulk of my work was sorting out mortgages for people whose criteria did not fit mainstream lenders criteria; self employed, low pay/high bonus employees, small business owners and the like.  My business also did some work on what was 'credit repair mortgages', which by definition are outside standard criteria. (Northern Rock for example).  Again used responsibly these products were very useful and successful.

When I first started lenders did not pay commissions (procuration fees, in the jargon), The way you got paid was by selling an associated life product - an endowment or mortgage protection life insurance - for the commission.  Or you could charge a direct arrangement fee, which we did mostly. (I never liked relying on indemnity commissions because they could be clawed back if the policy was cancelled in the first two to four years).

It is important to note that this was the way most real mortgage advisers worked.  That does not include most of those working out of estate agents, or the more questionable mortgage intermediaries.

The gradual introduction of procuration fees made this line viable and we built up a good business. By the early 2000's we were the biggest producer of self certification mortgages for an excellent lender - UCB Homeloans.

UCB Homeloans was by that time a part of the Nationwide group.  It had been established - I think - sometime in the very early 80's and knew the self cert market backwards.  It had a lower impairment rate than the Halifax.  It had excellent underwriting criteria and relatively low maximum LTV ratios; certainly lower than its competitors.  It relied on good pre-underwriting by its producers, like us. It charged a mortgage rate that was competitive but higher than the main market, because it was taking on higher risk lending.

By about 2004 +/- one year UCB's rates and criteria had become uncompetitive in the market.  Many new self cert lenders had been set up, mostly relying entirely on securitisation from the easy money in the bond market.

I valued the relationship with UCB,  But it was also becomingly screamingly obvious that we were in a classic time of massive monetary and credit expansion.  I telephoned the MD of UCB and we discussed the situation.  I said that I thought that UCB knew what they were doing and that the rest of market (mainly the new entrants) didn't and that they were under-pricing the risk.  He said, yes.

From that straw in the wind we worked ourselves out of the mortgage business as fast as possible.

Please note that all the forgoing relates solely to finding mortgage finance for owner occupiers, not buy to let.

Turing to buy to let, yes we have done a few, or rather we have small number of reasonably sensible BtL clients for whom we have found mortgage finance.  I do not need to tell you that all of these, all of them, have used the increasing equity in their existing portfolios to obtain funds for further purchases.

Whilst I was going through all this, you will all have observed in your own lives the massive expansion of mortgage lending from about 1994 to 2007, with particularly turbocharged expansion between 2000 and 2007, with a whole slew of new lenders. You will have also noticed the relaxation of criteria (lending based upon 'affordability' permitting ludicrously generous earnings multiples) and the very advantageous products - trackers at base plus 0.5% for the whole loan term.  (I snapped up as many of those as I could for our clients - serves the lenders right).

From this little history and analysis it should be perfectly clear that the reason and driver for the lending madness pre 2008 was government / central bank / regulatory failure.  All the mortgage market did was respond to the unwarranted expansion of money and credit by those three weird sisters. A classic example of the Austrian Business Cycle Theory boom phase. But, of course, that analysis would lead to the swift exit stage left of those same three sisters.

Then 2008 - bang.

Enter the MMR.  And note that this only dealt with lending to owner occupiers.  The MMR is right up there amongst the biggest load of self serving old tut that I have ever read.

If you study the material at the link you will note that the prescribed criteria for mortgage lending to OO's is now extremely challenging - and that none of that criteria apply to Buy to Let.

Since the MMR came into force the lending to BtL has expanded.  They can access credit and can still leverage their portfolios based on the inflated equity of their existing 'investments'.  This in effect gives them access to 'free' deposits.  At the same time the deposit requirements for OO's have been increased.

Furthermore the affordability assessments that lenders are required to use are system driven and distorted.  IMHO the very use of  'affordability' is seriously flawed as it permits, nay encourages. loan to earnings ratios of upwards of five times.  (In all my self cert business pre-underwritten by me I cannot think of any cases that exceeded about 3.5 times of the earnings I could establish).

The lenders also require squeaky clean credit history.  Many many people have the odd blip - a credit card payment recieved a day late, a previous address with a bad history, a water company failing to sort out a change of address etc etc and now, just one of those will get you declined, when previously a lender could 'take a view'.

There is much more to the whole farrago (e.g. the boxes we have to tick on the mortgage KFI's  which states that 'having assessed the market I recommend that you take out this mortgage' - I have never ever recommended that anybody take out any mortgage at all, ever).  But I think you'll probably get the picture by now.  The MMR is another failed regulatory intervention based on a deliberately self serving and flawed analysis of the situation pre 2008, which has also further distorted the housing market towards buy to let.

Death really is too good for the useless functionaries.


Mark Wadsworth said...

Aha, thanks, that makes sense now.

Lola said...

MW That's an edited version. I could write a book on it.

Bayard said...

Back in the 80s, AFAICR, it was said that the bedrock of the Tory party was the urban rentier. I wonder if all this was an attempt by Gordon B to quarry away some of this bedrock to build a platform for Labour.