As we draw to the close of 2007, the mortgage market remains in an unsettled state, with funding scarce, volumes down, and no early recovery in sight.
In the commercial mortgage sector we have not been immune from the troubles, but we regard the current situation as also presenting some opportunities as we move forward.
Growing numbers at the National Association of Commercial Finance Brokers show that the commercial broker market is expanding.
Regulation, diminishing returns and intense competition in residential broking has generated a flight to new markets. Whereas the turmoil is leading to consolidation in the residential market, on the commercial side, specialist brokers are investing in their business to tap into the growing demand among non-specialist brokers.
This includes the residential brokers that are diversifying into commercial mortgages and who need specialist help as they find their feet.
As loan criteria become generally tighter and rates rise, potential customers are more likely to need the expertise of brokers. Top quality service will be a key success factor, and brokers that can act more effectively than their competitors should survive and, indeed, prosper.
With regard to commercial mortgage lenders, there is clearly a greater focus on broker distribution as this route to market grows in importance. As the market grows, competition increases and drives innovation, pricing and risk appetite.
Increased choice and benefits for customers should be net effect of this. However, the credit crunch means that securitisation markets are likely to be bearish for over a year, increasing costs and making it harder for those lenders that rely on this method of funding.
Furthermore, the current turmoil is likely to restrict any more residential lenders entering the commercial mortgage market in the short term.
Transparency is arguably the most significant issue now facing commercial lenders and brokers.
In the recent case of Wilson vs Hurstanger, it was ruled that the broker’s non-disclosure of the commission received from a lender had resulted in the broker being in breach of his fiduciary duty to the customer, and the broker had to pay the borrower the value of the undisclosed commission plus interest.
This outcome has caused all lenders of non-regulated mortgages and loans to look carefully at their own rules for commission disclosure.
Lenders of unregulated mortgage loans have varying standards of transparency and, unfortunately, examples of poor practice can be found in the commercial sector.
Rate changes post-completion – either due to missed payments, expiry of a teaser rate or an annual review clause – still exist, as does the practice of having a rate floor set at completion meaning that a tracker product will not follow reductions in Base Rate. This last feature could be a big factor for clients if we are towards the top of the rate cycle.
Customers have been known to approach ourselves for a new facility only to find this effectively blocked by an interest guarantee clause on their existing mortgage – something designed for a long term tie-in in exchange for a lower day one rate.
In these cases a minimum number of years interest needs to be paid over and above the ERC, sometimes resulting in the customer facing negative equity despite the original loan only representing 65% of the property value.
Brokers and their clients need to understand any such terms, and lenders still using them need to communicate them clearly and carefully.
Any unregulated lenders and brokers operating in the UK mortgage market must aim for standards approaching those of the regulated residential sector in order to protect the reputation and credibility of the commercial sector.
If a broker is subsequently challenged by whatever party, about unfair terms in a mortgage contract, ignorance is unlikely to be a suitable defence.
So, if there are terms in any mortgage contract that are unclear, good commercial mortgage intermediaries must make sure that these are fully explained before the product is recommended to a client.