The Interview
generally where people think a “normal” market is, two things need to happen. The remortgage market needs to kick in but that won’t happen while interest rates are still low. The funding overhang is the other problem,” says Laing. Though Laing accepts it’s his own view rather than that of the bank, he believes getting gross lending to £140 billion next year will be a struggle for the market. “Shrinkage of the rest of banks’ balance sheets is keeping retail lending flat,” he explains. “Net lending in corporate and commercial arms for most of the big banks is negative.” In other words, banks are simply moving existing capital around from corporate to retail. “There’s only so long that can go on for and really for the good of the whole economy it needs to stop and turn around at some stage,” says Laing. “All of that plays through to the big banks doing most of the lending and other players being able to do very little. I’d love to have a more competitive market. We believe in participating in dynamic markets. The mortgage market at the moment seems too concentrated. You have to look to regulation to see how you loosen that up,” he says. At the moment, the regulator’s move
towards the market being exposed to less and less risk is being constructed in a way that forces a move towards fewer bigger banks, says Laing. “Parochially that is probably in our in
interest,” he concedes. “But as a matter of philosophy we’d rather see more movement, openness and dynamism.”
ThaT moRTgage maRkeT RevIew - agaIn
It brings us neatly onto the topic that is consuming the mortgage market at the moment - the latest consultation paper to come out of the Financial Services Authority on responsible lending. Among the many changes to MCOB regulation, the Mortgage Market Review is proposing to eliminate self-certification, fast-track and possibly interest-only mortgages from the market. “There’s a lot in MMR that we do support,” says Mathewson. “A lot of the proposals simply document existing,
good market practice. You won’t find one of the big six lenders that doesn’t do an affordability calculation for example. Or doesn’t stress test under different interest rate scenarios.” But there remain issues to be worked
out. “The bits that give us pause for thought
are the several proposals that go a long way beyond current market practice. Quite a lot of the ‘beyond’ is because it’s not good practice. That debate is one we’re trying to engage in at the moment,” he says.
On the practical implication of the
proposed rules, Laing is keen to underline the difference between existing good practice and what he thinks could be too far.
“It’s already our policy to assess mortgages on a capital repayment basis, it has been for quite a while now,” he explains. “Using interest-only as a way to gear up affordability is the wrong way to approach affordability.
“The peculiar part of the FSA’s consultation paper is that having established you’re speaking to a customer who can afford the mortgage on a capital repayment basis the FSA then insists that the only way that person can take the mortgage out is with a regular savings vehicle. That doesn’t sound as if they’ve started from the customer’s needs and worked back,” he says. “Legitimate customers who use
interest-only know that they have the income but can’t know when the income is going to come. For example a self- employed person whose income depends on a big invoice being paid. Or if a lot of someone’s income is in commissions, bonuses or overtime, very often they won’t know when that will come through.” People with a lot of secondary income, the term used by Santander for this sort of income, make up just over 20% of the lender’s applicant base. “They are a big part of the market,” says Laing. “And a decision not to offer them flexible loans is a big political deal.” Laing is particularly concerned about the specific wording on much of the MMR paper which he worries may change the market significantly.
“One paragraph in the proposed 38 mortgage introducer NOVEMBER 2010
regulations causes some concern,” he says. “It says if it is foreseeable in any month that the customer can’t afford their repayment then you can’t lend to them. If that goes into regulation as it’s scripted it will have massive consequences for the market.
“The Office of Fair Trading’s words
on irresponsible lending are slightly different. It says if the customer tells you it is foreseeable in one month that the customer may not be able to meet their repayments then you must take this into consideration. That’s different. “With the OFT I have to consider what and if the customer tells me about this. With the FSA’s version I have to be omniscient whether or not the customer tells me and then act on that. I have to distrust every customer, formulate what might happen and then not lend if there’s any perception that it might go wrong.” It is a point that many in the industry have raised similar concerns over. The FSA wants lenders to take responsibility for knowing how a consumer will behave in the future, which Laing points out is nigh on impossible.
He also suggests that the new rules will still let risks slip through the net. “I’ve been playing a couple of people
through the new regulations. One is a 20 year old lady. She earned nothing three years ago, £20,000 two years ago and £200,000 last year. Turns out she’s a model. What do I lend against? “I can verify all of that income but I
don’t know what she’ll earn next year or if she’ll still be earning in ten years. Can I give her a 25 year loan?
“I have to take a view because not lending to people like that is profoundly impactful on the market. You can’t get away from the hard choices in lending on mortgages being judgement calls,” he says. “You need within the culture of a lender to make those judgements well. In the example above I could comply with every letter of the FSA’s new regulation but still make a totally spurious judgement call on that loan.”
Mathewson also highlights his concern about the future of fast-track mortgages. “Fast track is about 30% of the
mainstream mortgage market and it runs
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