Simon Carr, Sales Development Director
OK, in my last blog I discussed the imminent arrival of the ‘newborn’. In a little over seven months we’ll see the birth of MCD, the emergence of a new era. But right now you could argue that many firms in the mortgage sector are still in denial (is this really happening? YES) or simply recognise the embryonic stage they are at.
Definition: Embryonic is an adjective that means ‘of an organism prior to birth or hatching’. If something is described as embryonic, it's just starting to develop or come together.
By now you will have all obtained the relevant Interim Permissions and submitted (or shortly plan to submit) your application for full authorisation; or have prepared your application to vary your permissions to continue to offer products when the new arrival makes its appearance in March. FYI, this is one arrival that will be making its appearance on its due date – there will be NO prospect of a two week ‘overdue’ grace period. If you’re not ready your ‘pride and joy’ won’t be coming home aka you won’t be able to trade – that’s a fact - the reality of 21st March 2016.
In March 2016, the FCA will recognise a second charge as a loan secured on land largely in the same way as a first mortgage and will treat them pretty much the same. The advice and the way products are structured will be similar. The new ESIS illustration and binding offer documents will lay out information for the consumer in the same way for both a first mortgage and a second charge loan. Second charge loans will then be subject to MCOB (and not CONC) and the loans will be written as regulated mortgage contracts and not regulated credit agreements.
So, MCOB 4 should then be a crucial consideration for all serious practitioners in the mortgage intermediary space. In your initial disclosure you have to detail the scope of service and ensure the product providers cover a sufficient composition of products across the market. The selection of providers and associated products should not disadvantage your customer. Only if the product coverage is sufficient can you describe your proposition as unlimited, otherwise you have to detail your limitations.
Now consider the introduction of a second charge loan as a regulated mortgage contract, and consider the customer’s requirements as a facility – the customer does not know if a second charge loan or first charge mortgage is the most suitable solution – that’s down to the mortgage intermediary. And you will also be obliged to explain the availability of other alternative finance options (such as further advances and unsecured loans) and the basis of your remuneration.
So, in the next 3 months (the clock is ticking), what do you need to do? Plan, plan, and plan. Consider your choices and please, please discuss your birth plan.
Who should you discuss your plan with, I hear you ask? If you’re directly authorised, then discuss with your compliance function or if you are an appointed representative, engage your network.
Review Review the post-dated version of MCOB 4 here Develop your birth plan. Discuss your birth plan – get it right. Start considering the customer’s requirements as a facility and do not automatically default to a mortgage. Test the Master Broker market to determine the right solution for your customers.
Remember, 21st March is coming, don’t be surprised and PLEASE heed my warning...
A chaotic mad dash as you are racing towards the due date will be too late – people will not be impressed, you will not be prepared and, of course, no one wants to upset ‘Mother’!
Precise Mortgages, the specialist lender, has today launched a range of buy to let second charge loan products. Rates start at just 5.95% and the products are targeted at prime landlords wishing to raise capital from the equity in their buy to let portfolios. Up until now there have been very few options for these customers other than remortgaging, but in many cases it would make more sense to take a buy to let second charge loan. Precise Mortgages estimates that the buy to let market is to hit £30bn of gross advances this year and approximately 50% of that will be remortgages.
Highlights of the new range include:
Alan Cleary, Managing Director of Precise Mortgages says: “We expect to see approximately 108,000 buy to let remortgage transactions this year and many of these landlords may have been financially better off if they had access to a competitive buy to let second charge loan product instead. Now they have.”
Simon Carr, Sales Development Director
In March 2016 the second charge loan industry bids farewell to the over restrictive (and ageing) Consumer Credit Act – legislation which was originally introduced to offer protection to the consumer. Now don’t get me wrong – in all of my blogs and articles; even in the products we have designed for the second charge market I’d like to believe that positive customer centricity has been common throughout.
The Consumer Credit Act 1974 (and subsequent amendments) has attempted to remain up-to-date and current. Whilst on the whole, it has, I firmly believe, also held back innovation in the second charge loans market due to restrictive conditions placed on product design. As a result, this has prevented alignment to the mortgage sector and ultimately, stifled product innovation.
March 2016 sees a new dawn for second charge loans with the FCA finally regulating this industry through its mortgage rules - MCOB (or, Mortgages and Home Finance: Conduct of Business sourcebook to be specific). Many experts are predicting a slowdown...me? I truly believe this market could grow beyond everyone’s expectations. **Caveat coming up now** If of course sourcing systems realise that an opportunity exists to source solutions that are based on the facility - not by tunnel vision – “So you want a remortgage to raise £40,000?” – then that’s what you’ll get, or, “You want a loan for £40,000?” then that’s what you’ll get.
Take five to sit back and let me get your imagination running wild...imagine a world where sourcing systems provided quotes for the facility on both first and second charge loan solutions....enabling blended rates and costs to be compared against the entire remo vs. safeguarding the low rate first mortgage AND securing the additional finance on the second charge loan.
Now that would be insane.
It would be like the first time Peter Kay tried garlic bread…..“GARLIC”......“BREAD” – never the twain should meet! Garlic bread seems to be the default position for any bread and garlic combo. Fast forward to March 2016 - consider having the remortgage and second charge option during the same conversation with your customer – now that’s GARLIC BREAD!!
The move from the Consumer Credit Act to full FCA mortgage regulation heralds the first opportunity to change the second charge loans market for good.
So what will you see?
Just take a look at the first mortgage market for inspiration. ERCs, no ERCs, val fees and changes to the way fees are charged (pay upfront, deduct or add to loan) all lending themselves to a little thing called product innovation.
I guess what I am saying is second charge loans will be able to stand shoulder to shoulder with first mortgage products – the end result? Lending solutions chosen based on what’s right for the customer. I do believe mortgage prisoners (price and criteria-driven) will continue to be attracted to the second charge sector but what you will see are more prime customers migrating to seconds.
There is more good news as you will see less of those adverts targeting “any/any adverse levels” or lenders considering less than responsible evidence of self-employed income. You will start to recognise these loans as suitable and not simply – this is all you can have!
With just shy of 9 months to go, my blogs will begin to talk about the steps intermediaries need to take in order to prepare for next year. (Can you hear a trumpet solo beckoning in the distance? The theme tune is coming...)
SPOILER ALERT! The Mortgage Credit Directive (MCD) is like expecting your first child. You know their imminent arrival date, as does everyone else... You think you are prepared and then before you know it, the little one is here and the nappies are still on the shop shelf whilst you are covered in... (I’ll leave it to your imagination here!) Do not be surprised and I warn you all now – rushing around the night before the MCD ‘due’ date will be too late – read my next blog to avoid disappointment, you know it makes sense.
And so, your favourite bit of the show, to your theme tune....
Education, that’s what you need, if you wanna be the best, if you wanna beat the rest. Education’s what you need if you wanna be a mortgage broker!
(Play the theme tune.)
Precise Mortgages, the specialist lender has restructured its sales team in order to react to increasing demand from its key intermediary partners and in anticipation of MCD implementation early next year.
The MCD will radically alter the second charge lending market as it brings these loans into the MCoB regime which results in the sales processes for first and second charges becoming more aligned. The lender has therefore made the following changes to its sales force:
In order to further support packagers, specialist distributors and master brokers Liza Campion and James Briggs become dedicated National Sales Managers focused on this important group of intermediaries. Liza whose expertise in first charge lending is complimented by James’ experience in the second charge market.
Jamie Pritchard and Richard Keen will work closely with Roger Morris in supporting mortgage networks and mortgage clubs across all lending lines.
Sundeep Patel will increase his focus in the London market and Kevin Beale will continue with his drive to improve the lender’s New Build proposition.
All will continue to be led by Roger Morris, Director of Sales.
Gareth Lewis and Chris Parr are unaffected by the changes and continue to drive bridging lending.
Alan Cleary, Managing Director of Precise Mortgages says: “Precise Mortgages has a very broad product range spanning Residential, Buy to Let, Bridging and Second Charges as well as an appetite to increase New Build lending. We have been encouraging our key intermediary partners to distribute all of our product lines and this change is reacting to that shift. In addition we must anticipate the changes that are likely to occur post MCD and react accordingly so that we give the best possible support to intermediaries and their customers.”
I always struggled with the term Non-bank. To be described as something that you are not seems a bit weird. The term covers a whole array of different lenders and in essence is any lender that does not use retail deposits as a source of funding its lending activities i.e. they use capital markets or some other type of funding model instead.
Many of the new entrants in the buy to let space, most of the bridging lenders and I suppose the Peer to Peer lenders are non-banks, but what does that matter to mortgage intermediaries and borrowers? The reason that we became a bank was very simple; one of the biggest learns we took from the financial crisis is that capital markets can and will be unpredictable and if you only have one source of funding it is very difficult to build a sustainable business.
Diversification of funding has been a key priority for us for the last five years and I am sure is a major focus area for the vast majority of lenders. Mortgage intermediaries and their customers benefit from a stable lending environment and from lenders that design and launch products that help solve customers’ needs and have sustainable funding lines that allow them to continue lending even when markets become turbulent.
Quite a lot has been written recently about the re-emergence of the securitisation market and it is without a doubt a valuable source of funding to lenders all over the globe; indeed we have issued four deals over the last 18 months and have plans to do more in the future.
But one has to consider the risks and the potential for the capital markets to hit a turbulent patch is ever present. Take Grexit as a topical example; this has weighed heavy on the capital markets and has no doubt caused some institutional investors to delay purchasing mortgage bonds or demand a higher cost of funds, this could and may well have had a dramatic effect on those lenders who are reliant on securitisations to fund new mortgage business.
Whilst writing this column the Greek comedy or tragedy depending on which way you want to look at it continues at a pace, one minute a deal looks imminent and the next they are calling for a referendum which effectively is an in out vote on being in the Euro; the longer this period of uncertainty continues the more of an impact it will have on the mortgage market.
Retail Deposits have proved to be a much more reliable and predictable source of funding and are significantly more liquid than the capital markets with in excess of £1.2 trillion in UK savings accounts.
You may have read that since we became a bank we have opened over 10,000 accounts for over half a billion pounds. Of course, becoming a bank is not something everyone can or wants to do but for those lenders that can meet the very high standards that the regulators demand this will be something that they are no doubt considering.
What becoming a bank allows us to do is to manage our funding requirements with a much greater degree of certainty and I have no doubt that if we were solely reliant on securitisation we would have put our foot on the lending brake by now, at least until the Greek situation had unravelled.
There is good news for savers as well as borrowers in more firms becoming banks. Indeed the regulator has sign posted that on top of the new banks already authorised there is a significant number going through the authorisation process.
The so called ‘Challenger Banks’ have been cited as creating some serious competition for the big six amongst the UK’s neglected savers. They have occupied over 90% of the places on the Best Buy tables over the last few months with rates that are far superior than that on offer on the high street. This is a very positive development for the mortgage market and specifically for the intermediary market as many of the new banks work very closely with mortgage brokers.