On the Road to Discovery Demand vs Supply in a Post-MMR World Presenter: Louisa Sedgwick

Head of Intermediary Distribution, Leeds Building Society

Agenda

An overview of MMR

- The impact on the market and the benefits for you and your customers

How lenders innovate with new products to meet customer needs

- The key factors lenders need to consider when designing and launching

products

Mortgage market ‘hot topics’

- Future industry ‘pressure points’ and key intermediary opportunities

How confident do you feel after MMR?

MMR has had a positive effect on broker market share

The Association of Mortgage Intermediaries predict that brokers

will be writing 75% of all UK mortgages by 2019

Quotes from brokers…

“Business levels have picked up and following MMR I think people will come via

an intermediary rather than direct”

“Business in the last 12 months has gone up 20%. People want to use brokers”

“Lenders are relying on intermediaries to hit their targets”

Source: BDRC Report 2014

The Purpose of MMR

A reaction to the ‘credit crunch’

Designed to deliver a “sustainable

market for all participants.. flexible for

consumers”

The right customers for the right

products

MMR sought to ensure that:

only customers who can afford a mortgage receive one

X “Tougher mortgage criteria will increase

affordability checks and completion times and

could bring higher charges”

? “Up to 1m potential homebuyers fear they will not get a mortgage”

“…three-hour interviews… and forensic analysis of your spending”

Media hype…

X “…tough new quiz to get a home loan

… the end of cheap fixed rates”

What were the main benefits for brokers?

Borrowers recognise the value of quality advice – and willing to pay for it!

Lender service improvements – forced technology changes

Increased procuration fees – across most lenders

High street branches have capacity issues

More product choice for your customers – ever increasing competition

Sources: BSA 2015

New products designed

fairly

How do lenders develop products to meet customer needs?

STRATEGY

Potential

segments are

identified

aligned to the

corporate

strategy

UNDERSTAND

CUSTOMER

Target

audience is

identified,

researched &

their needs

understood

PRODUCT FEATURES

Product features are fit for purpose and

appropriate to the financial acumen of the

target audience

DISTRIBUTION

Appropriate distribution model is

established, to ensure product reaches the

defined target audience

REVIEW /

EVALUATION

Based on

assessment of

risk a review

schedule is

agreed

CONTROLS

Controls are

applied across

the business

and overseen

by the 2nd line

GOVERNANCE FRAMEWORK

Processes and outcomes are reviewed

regularly through implementation reviews

Conduct Risk Committee

Product Development Board

…and are agreed through a committee process to ensure

recommendations minimise conduct risk and are in line

with agreed risk appetite.

All products follow a defined development and

review process…

Launched products are reviewed

throughout lifecycle according to the

level of risk identified

LAUNCH PROCESS

Products are launched following

appropriate engagement of the business

New Products designed

fairly

Contractors – an example

Understanding the Market

- 46% of businesses expect to hire

contractors over next 4-12 months

- 75% of contractors have been in work for

at least 11 of the past 12 months, and

84% expect more work in 2014

Launch Process

- Contractors identified as a

sustainable, underserved market

- Clear, definable target market with

potential growth

Finalise Product & Criteria

- Market more criteria driven than

price driven

- Salary restrictions and contracting

experience are key criteria factors

Launch Product & Review

- Phased roll-out of proposition

- Constant evaluation to identify broker

challenges and criteria opportunities

- Accept 12 months’ experience in any

sector. 6 week breaks allowed between

contracts

Source: Recruitment and Employment

Confederation (REC) 2014

The impact of funding models on product offering…

Building Society Bank

Retail funding

(savings deposits) Wholesale funding

(money markets)

- Building Societies are required to fund at least 50% of their lending from

members savings (retail funds)

- Banks rely much more on the wholesale money markets, which can be

cheaper

Source: BSA 2014

80%

20%

50%

50%

How it can go wrong…

Mortgage Funding

- Relying too much on short term money market funding

- Wholesale markets close e.g. 2007 credit crunch

- Followed by retail savers withdrawing = loss of all funding!

Source: The Guardian 2011

Wholesale funding

(money markets)

20%

80%

Retail funding

(savings deposits)

Other challenges for lenders…

Exposure limits

Limits control lender exposure to certain

markets...

• High LTV vs Low LTV lending

• Standard residential vs buy to let

• Fixed vs variable (administered) rates

Spread of markets needed in order to maintain

a sustainable business model

Too much exposure to a certain market could

have negative future consequences e.g. too

much new build or first time buyer lending

Lending risk vs reward needs to be closely

managed

Fixed Rate

Residential

50%

Buy

to Let

20%

Shared

Ownership

30%

Product Exposure Limits Example

Todays ‘Hot Topics’

Self-employed

• Number of self-employed workers increased by 300,000 over past 2 years (CML)

• Lenders responding to this change with updated affordability criteria

• SA302s/Tax overviews – where the accountant is key

Lending into retirement

• 1/3 of 2014 lending was to borrowers who will be 65 by maturity (FCA)

• Void between older and old

Help to Buy

• What’s next when the cash runs out? IMLA campaigning for permanent scheme

• Scheme has encouraged lenders to offer more 95% LTV products

Lack of ‘appropriate’ housing supply - need to build 250,000 homes a year

• Policy makers promise more construction – Conservatives pledge to build 200,000 starter

homes

• Release of cheaper, commercial brownfield sites for housebuilding

BTL - Credit Directive - changes in legislation

• FCA will begin regulating consumer Buy to Let (March 2016)

Industry pressure points…Interest Only

• Since MMR, the proportion of interest-only in the market has fallen from 30% to

less than 6%

• The FCA predict that 10% of interest-only borrowers do not have a repayment strategy

in place

£0m

£50,000m

£100,000m

£150,000m

£200,000m

£250,000m

£300,000m

2007 2008 2009 2010 2011 2012 2013 2014

Val

ue

of

ne

w r

egu

late

d m

ort

gage

s

All new regulated mortgages by repayment type (Source: CML)

Not Known Capital & Interest Part and Part Interest Only

Interest-only mortgages in the post-MMR world

Two key borrower types for interest-only mortgages set to mature before 2020.

Endowment Shortfall borrowers: set to mature around 2017/18

Interest only re-mortgagers: set to mature in 2027/28

Opportunity for these borrowers to remortgage to

part & part mortgage

Pay down capital in a more affordable way Source: FCA Review 2014

What’s the next bubble?... Lending into Retirement

• Affordability is a key issue

• The current life expectancy for men is 79.5 years in the UK. Women can expect to live to

82.5. These ages are set to increase

• 65s+ group who are self employed has doubled in the past 5 years to reach nearly half a

million

Population trends, employment patterns and pension changes are gradually

reinventing what retirement means for UK borrowers

Need for lenders to apply a common-sense approach when assessing affordability

Source: ONS 2014

What next…?

Mortgage Credit Directive (March 2016)

• Reforms to disclosure documents

• Replacing KFI with European Standardised Information Sheet

(ESIS)

• FCA regulation of consumer Buy to Let

Building on MMR compliance is seen

by many as a requirement of EU membership