11 minute read
Technology review
Clues to navigating the future lie in the past
Mark Blackwell
COO, CoreLogic
At times like these, it’s easy to see why people crave stability. Yet stability invariably comes from understanding and knowledge, and when those are in short supply, the world can appear to be an increasingly difficult place in which to operate.
The answer lies in knowing what to reference at times like these. Data may be historic, but much of it remains, like the lessons of the past, hugely important in shaping the decisions we make when confronted by the unknown – especially if we understand the problem we are facing and what data sources can help us overcome it.
So, even when the unexpected happens, we can act to mitigate the risk. Who could possibly have predicted the ill-conceived mini budget? The near-total collapse of the bond markets that followed was perhaps more foreseeable, but as the major insurers managing billions of pounds of the country’s pension savings discovered, the consequent collateral calls weren’t
planned for, even though they should have been.
It’s always the things we least expect that floor us, and in the property market we’re only too aware of that. The credit crunch and global financial crisis it precipitated are still very fresh in most boardroom minds. Many lenders and brokers came to a sticky end as a result of the chaos unleashed in the funding markets. The lessons were hard, and inspired a raft of regulations regarding both conduct and capital to ensure these events could not unfold again. But the thing about recessions and implosions more generally is that we never really see them coming. We can, however, be ready to make the right move if we understand the situation we are facing.
For lenders, what really matters is the quality and value of their back books. And it’s becoming a more immediate concern than even just six months ago. The cost-of-living crisis is very real, and it is going to affect balance sheets. The Bank of England warned back in July that banks and building societies must shore up capital reserves for just such an eventuality. The Financial Conduct Authority wrote to chief executives thereafter, urging, if not threatening to force, lenders to exercise forbearance when dealing with customers in difficulty.
The assault on borrowers’ finances takes us once again into uncharted waters. The cost of energy per unit may be capped until April, but what happens thereafter is uncertain. Jeremy Hunt has implied that help could be extended to those most in need – who are unlikely to be homeowners.
Arrears are almost inevitable. That is why lenders have been training customer service staff to deal with calls from worried borrowers for months now. But is that enough?
Lenders must manage their customers fairly – the regulator insists on it, and frankly, the economy relies on it. But that’s just one-half of the equation for them.
It is shareholders, as well as customers, to whom they are really accountable. The strength of their balance sheets is paramount, and that is set to come under serious strain in the coming months. Again – understanding the value of this is crucial.
So what should be done? I return to the importance of knowledge. If you understand your position, your weaknesses, and your strengths, you’re more than halfway there. It’s impossible to predict the future accurately, but there are things we can learn from the past. Data can tell us a lot when it is used to identify patterns. Rewind to 2008, 2009, 2010 – all those sub-prime securitisation and whole loan books that plummeted in value overnight. From the ashes of those whose lending policies had contributed to that collapse emerged credit assessment companies.
That was a capital crisis, but it’s likely this will be an income challenge. Reassuring shareholders and investors will therefore rely on capital stability; after all, that is what will see lenders through the oncoming months of forbearance. Knowing your balance sheet’s capital value in today’s market is crucial to providing that reassurance, and it’s easily done using data from sources such as automated valuation models as well as newer assessments of things like EPC value.
Joining up the right data dots can point us in the right direction to weather any storm. Data and experience combined remain the most potent form of risk management in any industry. That is the real opportunity for competitive advantage in the market we live in now. M I
Fixing the roof in all weathers
Jerry Mulle
MD, Ohpen
If ever there were an abject lesson in the consequences of failing to do your disaster planning, it has been the past couple of months in Westminster.
While the country and markets hope for certainty, we’re all now acutely aware that uncertainty is inevitable. What does that mean in practice for those operating in the mortgage market?
It’s impossible to predict the next downturn in granular terms – as the saying goes, no-one has a crystal ball – but that doesn’t preclude us from using past experience to shape the way we plan for the future.
Key to this is learning how to measure how you deal with the unforeseen, and that has to be understood within the context of regulation, economic health, and customer outcomes. While I would hesitate to call it a storm, the next change is rolling over the hillside and into view.
On 31 July next year, the Financial Conduct Authority (FCA) will enact its new consumer duty regulation, requiring firms to “act to deliver good outcomes for retail customers.”
The rules are unequivocal in their expectation, and state:
“Rules relating to the four outcomes we want to see under the Consumer Duty represent key elements of the firm-consumer relationship which are instrumental in helping to drive good outcomes for customers.
“These outcomes relate to products and services, price and value, consumer understanding and consumer support.
“Our rules require firms to consider the needs, characteristics and objectives of their customers – including those with characteristics of vulnerability – and how they behave, at every stage of the customer journey.”
This is a big shift in the way banks and building societies have managed customer interactions, until now governed largely under MCOB principals relating to treating customers fairly. Those principles still apply, but the specificity of evidence required as of summer 2023 adds a layer of clarity to this compliance.
In today’s market, where the economy is extremely vulnerable to shocks and the cost of living is really beginning to hurt homeowners along with everyone else, getting the evidence right really is make-or-break.
It’s an enormous job. You need systems that can support the delivery of operational models that give you more than interaction – they provide and record fair value for borrowers, and good outcomes.
Before technology came into the mainstream processing of deals, the decision to lend depended on the lender-borrower relationship.
As technology and its applications boomed during the 1980s and the great privatisation of the mutual market really got underway, getting a mortgage became increasingly commoditised. The aim of the game was shifting as much product as possible.
That continued into the 1990s, and it wasn’t until M Day in 2004 that regulators imposed rules on banks, building societies, and advisers.
Even so, technology served to allow lenders to process larger volumes of business, with fewer customer touch points, ending abruptly with the pot boiling over and complete closure of the market from 2007 and 2008.
Even the Mortgage Market Review, which from 2014 put borrower affordability at the centre of the transaction between lender and borrower, did not achieve a return to that old-world relationship-based lending agreement.
The market has become more and more product-focused. Keen pricing has become a euphemism for beneficial borrower outcome.
I don’t expect that to shift overnight, but the consumer duty rewrites the balance. That relationship between lender and borrower becomes paramount on 31 July 2023.
It won’t look the same as it did more than 40 years ago, but I do think it will transform the role technology plays in the process.
Order-taking has been facilitated by tech – the focus has been volume, efficiency, consistency. Now, behaviour will become a central part of the origination process. Knowing what to record and when will be a learning process, but systems will need to be flexible to cater for nuanced changes in what is required to evidence the very best possible practice.
The next big challenge facing the market is how it responds to the cost-of-living crisis and its impact on borrowers – both at the point of origination and throughout the lifetime of that loan.
Credit departments are suddenly having to manage asset and borrower risk from a financial perspective and from a social perspective.
To get this right, and to demonstrate that for compliance purposes, cannot be done without changing the function of technology systems. Box-ticking to satisfy the lender is out. Serving the customer in a way that suits them is very much the direction of future travel.
I’m not convinced that anyone would have guessed how quickly the market has moved and changed post-pandemic – even if some of it is perfectly logical in hindsight. But there is no reason to assume this pace of change and requirement to make operational improvements on the go will abate.
Flexibility, adaptability, and speed will become the backbone of successful lenders. You need systems designed to give you that, and not just a string of never-ending workarounds. M I
The bird is freed?
Neal Jannels
MD, One Mortgage System (OMS)
As we’ve recently seen from the Twitter takeover by Elon Musk, the tech space is a constantly evolving beast. There have been many reports circulating around how the online news and social networking site may be revamped by the multi-billionaire – or chief twit, as he describes himself in his Twitter bio. In equal measure, it’s inevitable that there will be murmurs of discontent over some elements of his stewardship.
The past few months and years have taught us that change is everpresent across all sectors, and that it’s inevitable. The mortgage market remains susceptible to the influence of a host of internal and external factors, often changing at breakneck speed. Therefore, it’s vital for firms to have systems and processes in place that can help combat some of the turbulence. And these systems and processes must keep pace with the demands of the market and customers to spot trends and deliver solutions that fill an important void.
Energy performance certificates (EPCs) have certainly generated plenty of attention from potential borrowers, existing homeowners, landlords, lenders, and the intermediary market in light of rising energy costs and growing demand from the UK population for greater energy efficiency.
This is especially apparent in a BTL sector where, despite wellpublicised government proposals still not set in stone around changes to EPC legislation, landlords need to ensure they are carefully evaluating their green options to help protect future income and ensure properties will be legally lettable in the future.
Research from Shawbrook recently highlighted that green mortgage discounts could be a key tool in helping landlords make the necessary upgrades to achieve an EPC rating of C or above. Forty-one per cent of landlords would like to see the lending industry introduce mortgage discounts for properties with better EPC ratings. Under current government proposals, buy-to-let properties will need to have an EPC rating of C or above by 2025 to be rented out to new tenants. This is expected to be extended to all tenancies by 2030.
However, while a number of lenders have introduced ‘green’ propositions over the last year, more than a quarter of landlords said they were unaware that they could access ‘green’ mortgage discounts, and just 18 per cent of landlords are currently making use of them. With 23 per cent of landlords saying one or more of their properties are rated D or below, and a further quarter unsure of the current rating of their properties, there is a concern that many properties may be unrentable in just three years.
More than half (59 per cent) of landlords said they would consider a green mortgage discount in the future. In addition to discounts, some landlords would like to see lenders help them with an action plan to improve their rating (33 per cent), or bridging finance to help improve ratings (28 per cent).
Awareness around EPCs, and the importance of how up to date these are and how they can be used in the mortgage process, have certainly risen higher and higher on the intermediary and client agenda. As such, we have recently added a system integration with the EPC register on the back of this growing demand. The aim is to provide users with the ability to search EPC records using a property’s address. In addition, we’ve also integrated with Companies House to allow users to search by name or registration number to retrieve all available details on a company from the Companies House database.
This pair of important integrations follows a series of new OMS platform updates to further enhance user experience. Highlights include a Lead Gen API to include more information around an applicant’s current mortgage, marketing preferences, additional security properties, and notes. This is in addition to a portfolio step including fields for date purchased, value at purchase, rate type, current rate end date, and MUFBs. There is also a lender submission step that allows users to see all lender integrations set up via the platform and to easily choose the one required for the case in question.
All service providers across the mortgage market have an ongoing commitment to investing time and energy in improving customer experience. There are times, as with Twitter, when change may ruffle some feathers, but change certainly doesn’t have to be bad. Especially when it comes to implementing the right kind of enhancements that better service the needs of everchanging consumer demand. M I
