Speculate to innovate

Grant Bather

November 3, 2007

Innovation is key to any business, whatever the sector you are talking about. Bill Gates, Richard Branson, James Dyson and Laszlo Josef Biro, among others, are proof of this, but in the mortgage market it is fair to suggest that recently innovation has been stifled by regulatory constraints and a tightening market.

The recent credit crunch has undoubtedly impacted the market massively and has led many organisations to reassess their offerings, and move out of certain perceived high risk areas.

Heavy adverse in particular has been hit by the recent market turmoil bought on by the US non- conforming market crisis, while the non-conforming sector as a whole, from near-prime to heavy adverse, have all seen hikes in product pricing and changes to criteria that have restricted borrowing. Lenders including Mortgages plc, and most notably Victori,a have been forced to change their business models in the tightening sector.


The self-certification market has also been forced to adapt to changing market conditions, following recent regulatory enforcement action and guidelines suggesting that firms need to do more to eradicate bad practices. All of these factors have severely restrained the desire for innovation.

The Financial Services Authority (FSA) has insisted the need for improvements within the market, with ‘Treating Customers Fairly’ and the need to improve record-keeping central to the FSA’s mantra over recent months.

The more frequent baring of its teeth with regards to fines and notices has also impacted the market and has led to some firms moving away from testing boundaries, instead relying on the tried and tested, which will not help push the market forward. In recent months, the FSA has fined the Minel Group Limited (Minel) £10,500 for exposing consumers to the risk of being sold an unsuitable equity release (lifetime) mortgage, while it has also taken action against Wills & Co Stockbrokers Limited (Wills & Co), and Hadenglen Home Finance plc; moves which have undoubtedly led firms to reassess their positions, for fear of regulator reprisal. However, the FSA has, on a number of occasions, disagreed that its recent action is stifling innovation.

Tried and tested methods

In any stricken market, lenders’ will rely on the tried and tested methods. While this will limit the number of borrowers that the products are available to, this represents a time of responsible lending and borrowing and should see the market go back to a more sensible footing. In the 12-18 months preceding the credit crisis, lenders had been actively seeking new markets, with both the buy-to-let and near-prime markets seeing a raft of new entrants.

At the time, a number of commentators questioned the new lenders commitment, admitting that those in it for a ‘quick buck’ would be disappointed, but said it was no surprise to see lenders diversifying their offerings to provide a more rounded service. As in any market, firms will seek out new opportunities and innovate to provide the best service they can to their customers and this was certainly the case over the past year and a half.

Recent innovations included the launch of point-of-sale offerings, 125 per cent plus mortgages, HomeBuy schemes, shared ownership and sub-100 per cent rental cover for buy-to-let properties. All of these have had a positive affect on the marketplace, and even in the troubled times affecting the market, a number of innovators are continuing to launch new initiatives in the sector, to help borrowers and intermediaries.

HomeBuy schemes, including shared ownership and open market initiatives, have been set up in conjunction with the government to increase property ownership among aspiring first-time buyers and key workers, while sub-100 per cent rental cover on rental properties has helped to fuel the continued growth of the buoyant rental market. 125 per cent mortgages have also helped to aid aspiring buyers with funding and, although these lines have been reined in as a result of the market climate, they still have a vital part to play.

New addition

Abbey has also recently made a new addition to the lending platform with the launch of its ‘Fix and Flex’ mortgage, which allows the borrower to fix their mortgage payment for the first six or 12 months, before reverting to a tracker, at 0.49 per cent above Base Rate.

Clive Kornitzer, chief operating officer at Abbey, says that even in the current climate, the conditions allow for firms to break the mould to deliver new, workable solutions to match market needs. He says: “The current market should be seen as an opportunity to explore new and innovative ways in which to approach mortgage lending.

“What is becoming clear is that what the industry needs are lenders exploring alternative solutions to help people get the mortgages they need. These need to be created on the back of a strong mortgage book built on responsible lending.

“Just because something is new and challenging does not necessarily make it risky. As long as lenders stay true to the principle of responsible lending there is no reason why we cannot offer brokers and homebuyers a wider and more innovative choice.”

Clare Mortimer, senior press officer at BM Solutions, insisted that tweaks, rather than wholesale changes were what the market needed at the current time. She says: “There’s often confusion between ‘invention’ and ‘innovation’. Invention gets better press, mainly because of the one-off mad-cap ideas that grab the headlines. However, innovation is often where the real benefit exists.

“Gradual improvements, which make a real difference to people’s lives. Mortgage products should be no exception. Lenders are constantly trying to balance the margin, volume and risk equation. At the centre of this process are brokers and consumers. Some of our best developments have come straight from broker feedback.

“However, innovation is not something that has a beginning and an end. Lenders that stop innovating because of liquidity issues will find that short-term issues become medium to long-term problems. It shouldn’t just be left to the bigger lenders to fly the innovation flag.”

With the population of the UK so diverse, and debt continuing to increase among individuals, in addition to more people looking at the opportunities within the buy-to-let market, it is evident that the market must continue to innovate across the lending spectrum. Increasing migration to British shores is one reason for the need for continued market innovation, while a lack of FTBs has been cited as the main reason for inspiring new, affordable solutions. The desire for innovation has also seen the increase of Sharia mortgages and equity release and bridging solutions.

However, it is fair to suggest that not all innovations have been welcomed into the market. The return of sale and rent back schemes has largely been criticised, with Michael Holt, managing director of SYH Charterhouse, warning: “Consumers need to be made aware that these schemes are unregulated and offer no guarantees or security of tenure.”

Despite recent market troubles, firms must continue to innovate. Those that don’t will be left behind. Although the pace of the market has slowed, it has in no way stopped. While maybe not the time to step up the pace, there is still opportunity for firms to try and provide solutions.

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