The Colour of Money

Whatever the official definition or spin may say, business owners that I speak to seem to pretty convinced that the UK is in the grips of a recession and that these are difficult times for businesses.

The credit crunch has far reaching consequences and affects all sorts of different businesses to a greater or lesser extent.

One sector that is suffering badly is the mortgage market. Of course we have all heard the high profile stories on the news about the effects of the credit crunch on this country’s banks and building societies. After all, it was the Northern Rock story which first brought the problems in the financial services industry to the public’s attention.

But what about the smaller companies involved in the mortgage business - the one or two man band financial advisers and mortgage brokers who help arrange mortgages for large numbers of the UK’s homeowners?

Well, they certainly are not short of enquiries. I’m involved in the running of a number of websites that give information on mortgages and provide leads to mortgage brokers. Visitor numbers to these sites are at an all time high as more and more people take to the internet in search of the best mortgages.

The problem is that often the mortgage advisers have little or nothing to offer these people. A year or so ago there were something like 8,500 different mortgage products to choose from. Over the past 12 months that figure has shrunk dramatically. The borrowing criteria have got much stricter too. So, whereas last year someone with credit problems might well have been able to borrow up to 90% of the value of their home, the lenders will now only look at a maximum of 75% or 80% in many cases.

So, the choice of products that a mortgage adviser can recommend to his clients is often severely limited.

What makes it worse is that the mortgage market is changing from one day to the next with products being withdrawn left, right and centre. One mortgage broker I was speaking to the other day told me it is not uncommon to help a client pick a suitable mortgage in the morning and then find that by the time they go to put the application form in the post later that day, the mortgage product has been withdrawn by the lender.

These problems are not just affecting borrowers who have got credit problems from previous late payments, CCJs, etc. increasingly, borrowers with a steady job and no history of bad credit are finding it tougher to get a mortgage.

Traditionally, these are the people who would be more likely to wander into their local bank for a mortgage than to use the services of a mortgage broker. But now that is not nearly so easy and even experts who previously cautioned people against paying fees to mortgage advisers are now going on national TV and saying that a broker’s expertise is worth paying for after all - even for borrowers who do not have any black marks on their credit file.

So, that’s another stream of new enquiries for the average mortgage broker. But that doesn’t mean he is necessarily able to do anything with those enquiries or make an easy buck.

In the past, once a borrower was given a formal mortgage offer by the bank, it was valid for typically six months or more and that was set in stone. So long as the buyer completed on their house purchase or remortgage within that time then they were assured of the promised funds.

But according to those in the industry that I have spoken to, those rules are now out of the window. What happens now is that some of the biggest lenders are re-underwriting the cases every month and making sure they still fit any new lending criteria that may have been introduced since the original mortgage offer was made. If the new criteria are not met, then the offer gets withdrawn.

What does that mean in practice? Well, let’s suppose that tomorrow you put in an offer on a house for £200,000 based on being able to get a mortgage of £180,000. That’s a loan to value of 90%. Once the survey is done and the paperwork completed, you would then expect to get a formal offer from the lender.

Then suppose it takes three or four months to get to exchange of contracts (which, let’s face it, is not uncommon when you are moving house and their is a chain of buyers, vendors and solicitors involved). And now suppose that a week or so before exchange, your bank that liked to say “yes” suddenly decides that it is reducing what it will lend people to a maximum of 85% - not just for all new applicants but also for people like you who have been offered a mortgage but not yet completed.

That means you can now only borrow £170,000 instead of the £180,000 you need. As a result, there is a very good chance that the whole chain will collapse leaving several people in the lurch.

Once that starts to happen on a regular basis then what chance is there for the UK housing market - which, let’s be honest, is already looking pretty knackered?

A business that is struggling has two options. It can attempt to increase the amount of trade that it does or it can try to reduce its costs. The wise business owner will attempt to do both.

But for mortgage brokers at the moment, they don’t seem to be able to do either of those things. They have no shortage of enquiries, but their hands are tied by the fact that their suppliers (the banks) are not providing the products for them to sell to their clients.

I know of two or three mortgage brokers who are looking like they may go under shortly or who are attempting to diversify into other things - such as helping people reclaim unfair bank charges or unfair mortgage fees (poachers and gamekeepers anyone?).

The upshot is that even if the mortgage marketplace sorts itself out (which it must surely do eventually) then by the time it does there may not be many mortgage advisers left. So, as has already happened with other areas of financial services such as pensions, investments, or life insurance, there will end up being too few advisers left in the industry and the ultimate loser will be the consumer who finds he now has less access to the help and advice he needs ot make an informed financial decision.