19 minute read
Technology review
What lenders do next will be key
Steve Carruthers
Head of business development, Iress
This year marks Iress’ Mortgage Efficiency Survey’s 11th outing. Interview invitations have been sent out, and I’m pleased to say that we’ve already had a really good reaction from lenders willing to take part in this annual research.
These reports have lasting value for our own business, but also because they provide insight into the temperature of the market overall. Each business faces its own challenges, particularly when it comes to how efficient their processes are. Last year’s report found, perhaps unsurprisingly, that lenders had spent 2020 and early 2021 investing heavily in measures to improve their processes. Lockdowns and remote working precipitated by the onset of the pandemic forced all businesses to review their models, driving them to adapt to a more flexible and accessible working approach. Lenders told us almost across the board that they had spent the past year focused on “system modernisation, process efficiency and digitisation”. At the time, we found huge gaps among lenders’ processing times, with significant variation in application-to-offer timescales – ranging from 14 to 32 days. Reliance on brokers also saw an uptick, from 77 per cent to nine out of 10 mortgage applications coming via the intermediary channel. Given the complexity of the mortgage market, the vast swell in demand on the heels of the stamp duty holiday, and bestbuy mortgage rates barely over one per cent, the value of mortgage advice for borrowers went through the roof. This context is important to keep in mind when collating this year’s survey. We’ve seen the base rate hiked four times since December, with it now sitting at one per cent. Mortgage rates are rising too, but so far, despite climbing borrowing costs, demand remains robust. Property prices are not only holding up, they are still rising at a rate in the double digits. Office for National Statistics figures recorded an annual rise of 10.9 per cent in February. The need for agility and efficiency is constant for any business, and after 12 months of focus on improving both, lenders are now seemingly eager to talk about the future. Already, just a few days into the interviewing stage, we’re hearing considerable positivity about the year ahead. Having just emerged from the latest reporting season for banks and building societies, it’s no wonder. 2021 was a record year for gross mortgage lending, with lenders advancing £315.9bn in 12 months, Bank of England figures show. Lender balance sheets reflect that, with the vast majority looking very healthy. This bounce in confidence is enduring, and the lenders we’ve spoken to are already positive that this year is one in which to focus on future-proofing their businesses. What that looks like for each lender is different, but there are some key themes emerging. While environmental, social, and governance are all priorities for lenders, the green agenda is the big one. Regulation designed to drive lenders to cut their own carbon emissions and support borrowers in improving their homes’ energy efficiency is now coming in at pace. EPC band rating minimums are now looking very real indeed for owner-occupiers and landlords.
In April, the government confirmed it is bringing various deadlines forward. Lenders are acutely conscious of this, with new products and green mortgages increasingly a focus across the market. The Bank of England has been very clear about its expectations of lenders’ role in helping to cut carbon emissions produced by the UK’s housing stock. Further product innovation and, inevitably, the process changes required to facilitate that are firmly in the minds of lenders for this year. The Minimum Energy Performance of Buildings Bill, currently in its second reading in the House of Commons, proposes to make it mandatory for all homes – including owner-occupier – to have a minimum EPC band rating of C or above by 2035. While 12 years may sound like a long way off, it’s clear that homeowners need to be thinking
now about how they’re going to pay for gas central heating to be replaced by electric heat pumps, double- or triple-glazed windows, and insulation of cavity walls and roofs. Given that the ill-fated Green Homes Grant hasn’t been replaced, the onus is firmly on lenders to find a way to support borrowers in paying for these changes. That’s something that will have to happen fast, as the Bill also stipulates that by 31 December 2030 all mortgage lenders must ensure the average energy performance level of their domestic portfolios is in at least EPC band C.
This year’s Mortgage Efficiency Survey will achieve two important things in understanding the last year’s performance and also casting a light on how lenders are adjusting to this future, and where they can take advantage of opportunities as they emerge. M I
The right time and place – the BSA 2022
Jerry Mulle
Managing director, Ohpen
This year’s annual Building Societies Association conference was held in Liverpool at the start of May. After last year’s virtual event, I must say it was most welcome to have the opportunity to meet friends and colleagues face-to-face again. For me this was particularly important, given that this year’s was my first BSA conference with my Ohpen hat on.
For those new to our service, it appears now is the ideal time to offer lenders an affordable way into our cloud-native platform – think interoperable, scalable, robust, well-supported solutions for every stage, from origination to servicing.
Given my role in the mortgage and savings markets, I was fascinated by the insights offered by those speaking during the two-day event and by the questions that the focused discussions elicited. Several themes emerged as the conference wore on, but a few really stick in my mind.
The green agenda was covered in detail, with the Bank of England’s Sarah Breeden raising some interesting views not only on how financial services firms support their own paths to net zero but, more importantly, how they support their customers and clients in their efforts to cut carbon emissions.
Another key theme was cybersecurity – the threat of being hit by malware or ransomware or losing confidential customer data to the dark web gets more and more worrying each day. Lenders are a prime target for fraudsters looking to make an easy buck by exploiting companies’ weak spots, often wreaking havoc on their customers while they’re at it.
The pace of digitisation, spurred by the pandemic and the rush to remote working, was a third point of discussion that popped up several times throughout the conference. Accessibility, security, and efficiency have posed multiple challenges to lenders wanting to support flexible working safely.
All three are inextricably intertwined, as conversations between delegates and speakers revealed. What seemed most important to building societies present at the conference was how to embrace change while still serving members to the standards they demand and deserve.
During his keynote speech, Robin Fieth, chief executive of the BSA, picked up on Sarah Breedon’s comments, agreeing that the onus is “on us all to seek to navigate this route [to net zero] such that we do encourage householders and landlords to invest in clean energy and greater energy efficiency”.
Critically, he also said: “We must do all we can to avoid creating swathes of new mortgage prisoners, trapped in energy-inefficient homes that are falling in value.”
His comments will resonate with anyone running a lender today.
“In our mutual world of savings and mortgages, one [thing] stands out for me in particular,” Robin said. “Do we green our own balance sheets by restricting new lending to homes and properties that achieve the magic, if flawed, EPC A-to-C rating?
“Or do we invest in the UK’s overall just transition to net zero by working with households to reduce their carbon emissions? Do we in fact put the greatest emphasis on and direct the greatest effort to supporting those living in the oldest and energy-leakiest properties?”
His questions are provoking. It’s one thing to switch all your light bulbs to LED, quite another to come up with a mortgage that helps borrowers to do the same. My own view is that it doesn’t need to be either/or. Moving from server-based systems to the cloud can cut a lender’s carbon footprint by 88 per cent. That same strategic decision also gives lenders the ability to design and deliver green products quickly and securely, not least because cloud-based software as a service makes the smart use of data not just possible, but easy.
Several speakers voiced the question on the minds of most mutuals’ boards: How do we become more technology-driven without spending a fortune on systems that don’t achieve our strategic objectives?
It’s a big question, and there are several ways to consider it. The pandemic exposed just how insufficient most companies’ security was outside of their physical office buildings – personal broadband connections used to connect to central systems with access to highly sensitive personal data are a catastrophe waiting to happen.
So, too, are the chinks in a company’s cyber armour that cannot be patched, even with new technology. All mutuals will know the headache caused by multiple systems, many of which are decades old and all of which store data in their own quirky formats. The fear that porting data from these legacy systems onto newer platforms that are fit for purpose in today’s market is serious, but too often debilitating.
There’s a temptation to think that when things aren’t broken, it’s best not to fix them. In the case of adopting true digitisation of banking processes, managing both customers’ savings and their mortgages, the adage is flawed.
There are solutions (and we provide one) out there that offer a safe transition to faster, affordable, and more secure software; embracing them is a no-brainer. M I
Buy-to-let is a model for the future of residential lending
Mark Blackwell
COO, CoreLogic
In my role, we spend an inordinate amount of time looking forward. But successful innovations need to consider the experiences of the past. An empirical approach can reveal a lot.
Though the mortgage market has changed over the past 10 to 15 years, in some important ways some things remain from the 1980s – borrowers still ask lenders for some money to buy a house, and in return they’re charged interest and agree to forfeit the house if they can’t keep up with repayments.
How precisely that happens has evolved massively. The early ’90s saw the carnage caused by 1989’s economic crash, but when the pain finally passed, the boom from around 1999 on was heady. Self-certification and subprime, discount rates and packagers were coming out of our ears – in hindsight, we might recognise that the market was out of control.
Interestingly, technology played a quiet role in that pre-credit-crunch peak. The first automated valuation models were being used, largely by newer tech-driven non-bank lenders, and it proved a game changer. Mortgage decisions in minutes. By anyone’s standards in 2007, that was just incredible.
The downside was lenders’ failure to match the clever use of data within AVMs with a similar degree of intelligence when it came to the other element of risk represented by a mortgage: the borrower. Many fingers were burned; suffice it to say that the global economy was left reeling.
Roll forward seven or eight years, though, and the mortgage market is unrecognisable. Technology has stopped being seen as a magical money tree, solving all of our problems in a single click of a button. The tech bubble of the early 2000s, followed swiftly by the global financial crisis fiasco, put paid to this rather naïve blind acceptance.
But technology has developed at an exponential rate, and the speed at which innovations are coming to market has not let up. Risk, data richness, and machine learning are now fundamental to the successful employment of technology in all industries, but particularly for mortgages.
Some subsectors have embraced digitisation much faster than others when it comes to smoothing the path to homeownership. In the unregulated parts of the market, and for buy-to-let in particular, underwriting that uses automated assessments of multiple sources of data is becoming almost commonplace.
The race forward in this part of the market has been fuelled by other factors, too. Conservative policy phasing out tax relief for buy-to-let landlords, combined with more comprehensive credit risk assessments imposed on lenders by the Prudential Regulation Authority, has radically reshaped the private rented sector.
Portfolio landlords owning a network of buy-to-let properties through a limited company are increasingly the norm. Unlike the case with accidental landlords, however, assessing the risk these far more complex borrowing prospects present can be genuinely overwhelming for underwriters trying to assess an application manually.
Data analysis facilitated by smart technology has become incredibly important – there are buy-to-let lenders out there capable of putting almost the entire application for purchase or remortgage into the hands of the borrower. That suits landlords, particularly those with large portfolios subject to a full underwrite under PRA rules. Time, effort, and money are saved by everyone.
We’ve discovered, following the launch of our own buy-to-let hub, that it’s not just front-end processing to which this tech can be applied. Back-book risk is an increasingly important consideration for credit teams and compliance. Running the tech to understand the granular spread of risk sitting on a lender’s balance sheet doesn’t just provide insight into the strengths and weaknesses of their portfolios; it also provides hard evidence to inform future lending strategies and priorities.
For brokers and landlords, the experience is a breeze. DIPs can be delivered in minutes without the cavalier enthusiasm witnessed from 2006 to 2007. This is evidence-based decision-making. Over 20 lenders active in this market are using our service to originate and understand the risks on back books.
Providing the tools and data to understand a market that has undergone so much change in such a relatively short period of time gives me confidence that we will make significant progress in other markets. Our lending hub is doing that, and it will do more as more data is accessed through it.
The next challenge for the mortgage industry is how we accelerate the transfer of this experience and modelling of the portfolio buy-to-let market into the far more heavily regulated residential mortgage sector. It is a huge opportunity that the drive for better understanding of property energy performance will do much to quicken. We are ready. M I
The way we lend will change
Tim Hague
Director, Sagis
Markets never stay still, but there are some periods when change happens fast. The past 20 years have been one of those periods and it’s the unlimited potential of the internet that’s done it. As technology has developed, it’s grown exponentially, sometimes leaving us reeling at the speed at which things now transform.
It can be tempting to fall into the trap of thinking all change is good. Investing in technology for the sake of it, however, is almost always inadvisable and can prove an extremely expensive error in judgement when one looks back.
That said, failing to move with the times and as the market develops is an equally bad idea. The challenge, then, is knowing what to change and what to keep the same.
Many lenders are currently in the middle of this quandary, and the importance of getting it right has been amplified by the pandemic, the economic standstill it triggered, and the vast amount of public spending to shore things up. And the inevitable painful burst of inflation we’re now witnessing will simply add further challenges.
Not only is the market moving, but customer profiles are also highly unpredictable because of the economic situation. As ever, uncertainty creates challenges, but it also provides opportunities. Necessity is the mother of all invention.
It’s an interesting time. Typically, economic downturn and recession breed conservativism (with a small c), an aversion to risk-taking, a ‘Save, don’t spend’ mentality. This time I wonder whether, contrary to the norm, the economic phase we’re going into will actually trigger some of the biggest innovations the market has seen in years.
We have more lenders than ever fighting to lend in an asset group that is more popular than ever, as inflation ensures others underperform. Borrowers may well need new solutions in terms of propositions to make lending affordable, but there are many signs this is underway.
This context brings me back to technology and how to invest in it wisely. It’s been a long time coming, but the way our economy is structured now bears very little relation to the design of mortgages – or pensions, for that matter. Innovation on the product side has tinkered for a decade after the scalding that subprime and self-cert delivered. Yes, we’ve seen a bit of flexibility come into the later-life sector, and buy-to-let affordability models have been forced to change by regulation clampdowns.
But really, the change in straightforward residential mortgages has been incremental. The most that can be said is that terms have climbed from 25 years to 40 in some cases. A number of 10-year and even 30-year fixed rates have come to the market, but short of a splash in the media on launch I’d question their impact on the wider market.
I suspect this is about to change radically, and, as ever, it will be driven by demand.
We’re already beginning to see some of the seeds of change, though I’d argue that tightening affordability assessments to account for future inflation is an oversimplistic patch on a problem that is going to become serious. This is lenders protecting their balance-sheet risk sensibly, but it’s not going to be a long-term play if getting money out the door is the objective.
There are big questions facing lenders today, not least of which is who they want their customers to be. Propositions need to be reviewed in light of the cost-of-living crisis and the shifts in global and local economies that affect individuals’ personal finances and working patterns.
This is what should be informing any decisions when it comes to investing in new technology to improve user experience, efficiency, and profitability.
The good news is that the services available today are entirely capable of supporting lenders facing such a wide range of possibilities for their customer base. The key is not to be prescriptive – adaptability, flexibility, and scalability are what’s important for lenders to win over the next decade. Cloud-based services are built for this purpose, allowing lenders to ebb and flow as economic shifts unfold.
The speed and ease with which lenders can pivot propositions in response to emerging market demand is going to separate the lenders that will thrive because of the uncertainty we face from those attempting to survive despite it.
We are not going back to ‘normal’ from here. We are going into a new unknown – we will have to work longer, pay more, suffer smaller disposable incomes, and somehow get through it. Get through it we will, though; it’s up to lenders to decide how they make the transition. M I
The value of time, tech efficiencies, and choice
Neal Jannels
Managing director, One Mortgage System (OMS)
I’m sure that many of us out there are constantly striving to maintain a better work-life balance. This is often easier said than done, especially when operating in such a fast and frantic industry as the mortgage market over the past couple of years. Of course, we should remain thankful that, from a work perspective, this period has, generally speaking, treated us so well and that we have managed to remain busy and active pretty much throughout. Many other people in many other sectors were not so fortunate. However, there is no need to feel guilty for feeling a little jaded at times – it has been a testing period – or for taking a small step back to delve a little deeper into what lessons we may have learned over the course of the pandemic.
For me, one of the biggest lessons has been the importance of time, efficiency, and choice. We all have different motivations in our working environment, and, as a business, we have found that the importance of these factors has been crucial to how we have continued to develop the OMS platform before, during, and post pandemic. Even before lockdown, there was growing interest from a range of companies who were looking to invest in a CRM system for the first time or were demanding more from their current provider. There were others who didn’t really understand the impact of such a solution. What we are now facing is a situation where a rising number of intermediary firms are looking to manage their customer data better, offer stronger sales support, deliver actionable insights, integrate with social media, and facilitate team communication. A good CRM system will also support lender integration, audit trails, AVMs, and credit searches to cut admin burdens across the board and help deliver greater efficiencies.
And why is this so important? Well, whilst we are seeing a slight slowdown in activity across some areas of the purchase market, time remains a hugely precious commodity for advisers, as workloads remain high following record levels of business at the end of 2021. This was illustrated in the latest research from the Intermediary Mortgage Lenders Association, which found that the average number of mortgages placed per year by intermediaries diminished only slightly in Q1 2022 when compared to Q4 2021. At the end of 2021, the average was 103 – a record high – and in the first quarter of 2022 that fell slightly to 97, matching the rates for Q3 2021, which at the time was a record year.
Despite a slight reduction in the average number of cases, the confidence of intermediaries in the business outlook for their own firms remained high. Sixty-two per cent of intermediaries said they were “very confident” about the outlook for their firms, maintaining the same rates of confidence reported at the end of Q4. Ninety-eight per cent of intermediaries were confident overall, with only a very small minority (two per cent) describing themselves as “not very confident”.
The average number of decisions in principle that intermediaries processed in Q1 rose by two when compared to the final quarter of 2021. Despite a drop in January (to 28 per intermediary), the following two months saw a strong rebound, with February reaching 32 per intermediary and March hitting 37, a two-year high. This rise comes alongside homeowners returning to the market, aiming to remortgage or secure new fixed-rate mortgages.
It is a real positive to see sustained momentum across the mortgage market in terms of demand and activity, but there is still room for all of us to be more efficient and effective in our working practices and to benefit more from the right kinds of tech support. As volatile macroeconomic trends hit personal finances, advisers will continue to play a critical role in helping borrowers to find appropriate, affordable, and sensible deals. In the same vein, it is also vital for advisers to integrate cost-effective technology to better support efficiency, productivity, and engagement with clients and within the workforce.
So maybe this is the time to assess what we have learned from an individual and business perspective over the course of the pandemic and evaluate the role technology can play in helping overcome any lingering issues. In doing so, advisers offer themselves a better chance of establishing that all-important work-life balance and really being able to embrace those all-important elements of time, efficiency, and choice. M I
