Banking Crisis - Treasury Contents


Memorandum from John Cartlidge

THE STRUCTURE AND DELIVERY OF CONSUMER MORTGAGE PRODUCTS

WHO AM I?

  I am a self employed Independent Financial Adviser and Mortgage Broker. My first employment at the age of 16 was with the then Birmingham Midshires Building Society. Apart from a couple of years involved in care work, and a brief sales role with a media organisation, all of my employment and experience has been with consumer financial products and advice. My experience is broad in this arena, from in 1992, challenging a Director of Bear Sterns on the prudence of securitised loans, through to managing a mortgage processing centre handling 200 applications per week. I have worked for small brokerages, as well as large banks and insurance companies. I have been a "one man band" IFA since 2000.

INTRODUCTION

  Many observers including the committee have noted the shortfall in understanding of complex financial instruments between financial institutions, yet I believe the same financial institutions impose similarly complex and ambiguous terms onto mortgage customers. In addition, there are other issues that I feel the committee and others should address. The committee is already aware of the now very high margins between base rate and charged rate and so I do not comment on this. The changes I suggest to consumer product structure would have the effect of ensuring the lenders used more stable internal financing also. In keeping these notes as short as possible, references and examples have been kept to a minimum, but I would provide more if the committee so requests.

COMPLEXITY

  Mortgage lenders are aware that many borrowers use internet comparison websites, newspaper articles, "best buy" tables' and so on when looking for a mortgage product. In effect, the lenders know borrowers chase the loan amount, and the rate, and very few give thought to other charges and restrictions.

  The lenders strive using many different devices to secure places on "best buy" tables and so receive enquiries from customers. In offering attractive low rates, the lenders then use means to recover the cost of this headline-grabbing rate. This has increasingly been the case over the last 5-8 years, but a current example might be the Alliance & Leicester mortgage deal of 3.19% fixed rate for 2 years, but which has a 2% arrangement fee. Typically, such a fee is added to the debt, and it attracts interest charges, but this would not appear in the "best buy" APR figure. Consumers sadly are taken in by such deals. Another example is C&G plc (Lloyds Banking Group) that has 2 fixed rate offers, one at 4.99% but with a fee of £995, and the other at 5.39% but with no fee, but according to C&G, the APR is exactly the same: 5.8%. I have the capacity to understand that a fixed amount fee deal might benefit the borrower looking for a larger loan, and the higher rate, but no fee might be more suited to the borrower looking for a smaller amount, but many consumers do not, and end up taking the lower rate, the fee is added to the loan and incurs interest and so on.

INTEREST RATE MARGINS

  The committee will be aware of the great efforts by many lenders to use the news grabbing "standard variable rate" to show how they have passed on a rate cut. However, there is now a very short list of lenders who will actually accept all application at the standard variable rate.

  Such lenders who do not permit such an application include C&G & Northern Rock. In my opinion, this is to ensure that new customers must take one of the more complex and more expensive products carrying fees etc.

LESS THAN CLEAR CHARGES

  Many lenders now use different terminology for the same fee; Booking fee, reservation fee, administration fee, arrangement fee, product fee and so on. I personally believe that no such fees should be charged, as these companies are banks and the model should make money out of lending, ie interest received, and not by fees. Sadly, I don't think the committee will get the banks to accept this, so if a fee is to be applied, there should be one generic fee term employed. An example of the complexity lenders use is on the C&G website:

  "There's a reduced product fee of £895, knocking £100 of the usual fee." In the small print that one has to seek out however, there is the additional charge of an application fee of £99.

VALUATION FEES

  A most unpleasant activity of mortgage lenders is the high margins applied to property valuation and survey fees. Perhaps the worst offender is Northern Rock. In a recent mortgage illustration, the valuation report fee was £735 and this figure includes a "commission" of £345.00 payable to Northern Rock for (quoting from Northern Rock literature) "facilitating, accepting and assessing the valuation report for mortgage purposes". Facilitating, accepting and assessing the valuation report for mortgage purposes is what lenders do, and they should not be making money out of the valuation fees.

  I note a number of traditional building societies do not charge any valuation fee, as they accept that assessing the risk of a loan proposition is part of the business model that allows them to charge interest. Those that do merely ask for the actual cost. Valuation fees charged by the lenders for the same estimated house value vary from £150 through to £550, yet the amount paid to a valuer is on a set scale. Also, many lenders now have their own in house or staff valuers, and so do not have to pay an external party at all. I would like to see the position where for a basic valuation, no lender can charge any fee, and for more detailed surveys, only charge the actual fee incurred.

ACCESS

  There are some smaller lenders who carry an association that restricts to whom they might lend, either by geography, profession, union affiliation and so on. As this is the stated position, then this is appropriate, and based in the traditions of many of the original building societies.

  In recent years however, we have seen increasing numbers of lenders first of all courting intermediaries to introduce customers, and then for no consumer valid reason, refusing to accept intermediary introduced business. Some lenders have even commented it is to control quality, but it is an abuse of the larger number of customers chasing smaller amounts of lending, and forcing customers to go direct even if they have an adviser. Even more worrying, is the increasingly broad convention that customers who go direct to a lender, will have the choice of better deals than if they sought advice from an independent adviser. Genuine adviser's receive very little in terms of commission from lenders, and I as many other have done, have arranged mortgages for customers when no commission has been received, but it is part of the service we provide to protect the best interest of our customers.

  The govermnent, via the HMRC, allows an individual to appoint an adviser to arrange and administer a persons tax affairs, provided obviously the person confirms their appointment. Why can the banks not allow a customer to appoint an adviser to help them with their borrowing? This creates a barrier to advice and service that intermediaries can provide. The research and preparation prior to an application means that almost without exception, the application a competent adviser submits to a lender is successful. The lenders should acknowledge this, and allow all customers to have access to all products via all channels be it branch, online or intermediary, be they existing or new customers.

AFFORDABILITY

  Whilst high loan to values have led to a portion of current property and mortgage difficulties, the high loan to value was a by-product of the excessive loans to affordability being offered. I believe the banks should compete on their internal costs and the service they provide, and not on having an offering that is perhaps desirable to the borrower, but detrimental to them also, by allowing them to borrow too much.

  I would suggest affordability be based on a set "worst case" scenarios, and to either a regulatory set fixed percentage of net income, or a fixed industry wide income multiple.

ILLUSTRATIONS

  There is a well known activity in financial services regulation design known as "gold plating" where each party to a potential regulatory issue each adds their own degree of safety and security, but each time, forgetting who they are trying to protect, and adding further text, or small print adding complexity that consumers, often driven by motivation to move home, raise funds, buy their first home, do not look into.

  The term APR is supposed to be the leveller, an easy comparison, but because of the very differing customer circumstances with mortgages, the only way to get a true comparison using APR would be to get a full 7-9 page illustration from each mortgage lender for each of the available mortgage products, then tabulating the APR's. This is because the set terms used for APR calculation are of no value to a customer who for example, is looking to borrow for longer than the "standard term", or wishes a more detailed survey, or wishes to borrow for a shorter term.

  Removing the variables of less than clear charges, hidden loadings to valuation fees, complexity of products and illustrations, access and clarity, the banks will be forced to compete on service, and profit from lending, and not from confusion and fees.

CONCLUSION

  It is necessary to change the way mortgage products are packaged and charged, and the costs should be few, clear, and from a level position, presented in an illustration no more than one page long. It is possible if the banks will agree to compete on service and not on confusion marketing.

  A level approach to affordability and genuine access to all products will mean far fewer repossessions, far fewer borrowers requiring government support, far more stable house prices, and far more stable banks, with borrowers working to live, and not living to work.

19 February 2009





 
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