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.  

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.

All 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.

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