Looking back or looking forward - MMR, one year on

It has been one year since the much-discussed Mortgage Market Review landed upon the UK mortgage market, amid varying degrees of concern about its effects on homebuyers and lenders alike.

Related topics:  Special Features
Amy Loddington & Rozi Jones | Financial Reporter
26th April 2015
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Some worried that the new affordability rules would stifle the market beyond repair, with others lauding the changes as a step forward towards a more responsible lending climate.

The twelve months that followed have been an undeniable learning curve as the market has adjusted both its viewpoint and its practices to reflect the changes. At the time, the FSA’s Martin Wheatley said he was ‘very confident’ that the new rules were ‘proportionate and sensible’, and would ‘create a more sustainable mortgage market where consumers are put at the heart of every decision’. He did note, however, that he did not know whether it was possible to ‘solve the problems of the last 20 years’ within the mortgage market.

The changes have most affected those ‘at the coalface’ in the twelve months following the implementation of the new rules, so we turned to them for their honest assessment of the mortgage market one year on.

Disrupting the market

Santander’s head of mortgages Miguel Sard has talked about MMR bringing “disruptive change for the market in the most positive sense”.

He argues that implementing the required changes presented a number of challenges but the industry has come out the other side stronger, fairer and more sustainable as a result.

He added:

“The journey has been good for the industry as a whole and takes us ever closer to ensuring that banks lend responsibly and consumers borrow affordably. Of course there is still work to be done, but the mortgage market has come a long way in the past year and looks set to continue on this positive path.”

Peter Brodnicki, CEO of Mortgage Advice Bureau, echoed the element of disruption that MMR brought to the market initially, noting that it caused some difficulties at outset primarily with some lenders experiencing small but disruptive IT issues, but he argues that these were resolved very quickly.

Richard Pike, Sales and Marketing Director at Phoebus Software Limited, agreed, adding that “the effects of implementation were still being felt by some lenders”.

He added:

“It touched so many parts of an organisation whether it be IT, compliance, risk, finance or sales that some companies had to significantly change how they operated in the market and the actual costs of the MMR may never be known.”

Winners and losers

One concern which was much-discussed prior to the implementation of MMR was how it would affect the processing time of mortgages - and The Source’s Head of HR & Compliance, Phil Lewis, took a negative view, saying anecdotal evidence from the broker market suggests MMR mortgages are ‘taking a lot longer to process’ as lenders complete more checks.

He added:

“The main ‘achievement’ of the MMR appears to be the entrenchment of the risk averse approach to lending that was already in place at most lenders following the ‘credit crunch’.

“Just as worrying is the cumulative effect of the forthcoming Mortgage Credit Directive, which will have to be adopted by lenders during the same time period when the FCA will be carrying out their own review into the effectiveness of the MMR. I suspect the combined effect of these two pieces of legislation will work to constrain lending in the mortgage market for some time."

Doug Crawford, CEO of myhomemove, agreed, adding that MMR has created “some losers - notably the self-employed and older borrowers who in some cases have struggled to get mortgage applications approved”.

He said that the tough affordability rules have constrained lending, making it hard for older borrowers without evidence of their future retirement income or for self-employed people with irregular working patterns to prove they will be able to pay back the loan.

Chris Bramham, director of mortgages & BTL at Brightstar, stated that it is right that people only take out mortgages that they can afford, but “some of the rules have gone a bit too far when there are people with perfect credit records and payment history, who are unable to move house or remortgage because they do not fit over zealous affordability criteria”.

However the Financial Conduct Authority’s Lynda Blackwell said at the recent FSE Glasgow that it is not the stricter regulation of the MMR which has affected these groups.

She acknowledged that lender appetite has changed significantly since the implementation of the MMR, with ‘improved standards and lending quality’, which she said was not a temporary change.

However, she added:

“MMR came into play on 26th April 2014, although it is generally accepted that most lenders implemented the new rules long before that – and I don’t think, for credit adverse borrowers, there has been any perceptible impact as a result of the MMR. What happened to this market happened post-crisis, not post-MMR.

“That’s when lenders’ risk appetite changed dramatically and actually, lending to the credit impaired has remained pretty consistent. It is hardly surprising that it’s a struggle – it is high risk lending and lenders are wary of going there. It’s wrong to point the finger at regulation and MMR when the pull back from this happened six years ago.”

Blackwell also commented on lending to borrowers going into retirement, and illustrated that lending to over-65s has actually increased post-MMR. She acknowledged, however, that future relaxation of lenders’ criteria – for example, to borrowers over a lenders’ upper age bracket - was limited by regulation, but argued that this ‘isn’t conservative lending, but responsible lending’.

Peter Brodnicki said that while issues still exist around ending into retirement, interest only and the treatment of existing borrowers who would be better served by being allowed to take out new lower rates with their existing lender where they are not increasing their borrowing, the regulator is expected to look into these and other factors later this year as part of their review.

Turning to the middleman

Although lending may now be both stricter and slower, many of those we spoke to pointed out the positives that have resulted since MMR’s implementation. Lending via intermediaries has seen a significant boost since last year, and Peter Brodnicki has argued that mortgage brokers’ experience has given them the advantage when it comes to taking a share of this new lending landscape.

He noted that almost all mortgage brokers have only ever operated on an advised basis and were thus better-prepared for the rigours of the new rules - however, for the high street brands (many of whom operated on an “Information only” basis) this was a ‘significant step change’ and necessitated an increased level of training and management resources to allow them to operate in an advised world. Therefore, suitably trained and qualified mortgage advisers are taking an increasing share of new mortgage lending.

In 2013 as a whole, around 57% of FTBs – 50% of home movers and 54% of remortgage borrowers arranged their mortgages via an intermediary. In 2014, those intermediary percentages had increased to 62% of FTBs, 56% of home movers and 62% of remortgages, with the trend rising almost each quarter on quarter - encouraging statistics for the intermediary market.

Richard Pike of Phoebus agreed, noting another positive for intermediaries as “volumes are increasing as lenders look to intermediaries to do more compliant selling for them, and in some cases proc fees are increasing as a result”.

Looking forward

There can be no denying that MMR has caused a significant amount of upheaval and, at times, confusion in the mortgage market. The effects have been felt primarily by the lenders and intermediaries with the bulk of the changes occurring ‘behind the scenes’ - Doug Crawford, CEO of My Home Move pointed out that “while some mortgage applicants might be surprised by the extra questions they get asked compared to their last mortgage, most people don’t notice that the process has changed”.

Despite these changes, the market has adapted to the new regime - and with the Mortgage Credit Directive’s final rules now published by the FCA, it’s important to recognise that change is still underway. The FCA ushered in MMR with the knowledge that the European rules were on the horizon and the mortgage market is still some way off achieving status quo in terms of a clear and universally implemented set of rules.

While looking back on the year following the MMR highlights some of the challenges and opportunities brought about by new regulation, it seems the industry would benefit by looking forward to ways in which to fix areas of the market which are still underachieving. Andy Knee, Chief Executive of LMS, said “the first year of the MMR was about creating a stable and secure market; with a strong regulatory system in place” and it seems that the next year should be about adapting to a new mortgage market in which the regulation works for everyone - consumers, lenders and intermediaries alike.

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