I’ve written before about the use of the word ‘innovation’ in the mortgage marketplace and how it appears to mean one thing, when in reality it means something completely different. Lenders take the brunt of the ‘quest for innovation’ criticism from all sides and many stakeholders will peddle the argument that there is not enough ‘innovation’ from providers.
This is often a point raised by mortgage brokers however it’s ostensibly a red herring. I would argue that truly innovative products in the mortgage market are as rare as hens’ teeth – there have been some but just not many – and this is not likely to change.
When calls for innovation are made what the vocal proponents of such ‘innovation’ are actually calling for is one of three things: 1) cheaper pricing; 2) less stricter criteria; and 3) increased procuration fee levels. Indeed, most on this side of the argument would suggest that a truly ‘innovative’ lender should really be delivering all three.
Of course in the immediate aftermath of the Credit Crunch this was far from the case and, in our buy-to-let sector in particular, there was higher pricing coupled with tighter criteria and, at best, stable proc fee levels. To my mind, and particularly after the largesse of the pre-Crunch era, this was an absolute necessity and brought us all down to earth in terms of the requirement for responsible lending.
Looking at some of the most recent announcements by buy-to-let lenders I wonder if the ‘innovator’ arguers are starting to get their own way again. Lenders appear to be delivering price cuts, criteria is starting to be relaxed – not to pre-Crunch levels however – and we might leave the proc fee argument for another time. The point is that buy-to-let lenders have predominantly acted with great responsibility in the past four to five years and this has not stopped the buy-to-let sector from showing its strength and continuing to grow from those days.
My point is that, just because the sector appears to be strengthening, there should not be an overwhelming rush to push up the risk curve and loosen the criteria that has stood the market in good stead during that time. Moving the income goalposts or raising the number of mortgages possible with one lender may seem like small movements in the right direction – as far as brokers are concerned – but where do we move to next? Is this the first step back down the road to 95% buy-to-let mortgages and 100% rental cover, to no maximum number of mortgages with one lender and no value cap on landlords’ portfolios.
We in the lending fraternity should be very careful and remember what the market ended up being just before the Crunch. It’s unfortunate that some within the industry have very short memories and the old adage that ‘one swallow does not a summer make’ is particularly pertinent to those who believe the only way is up and risk is something to be confronted rather than managed.
It’s understandable that brokers active in this sector want to help as many clients as possible however just because a client wants to buy an investment property doesn’t mean they are in the right financial or personal situation to do so. Certainly, the ability to have plenty of skin in the game should be an absolute cast-iron requirement for entering this market. We would do well to acknowledge that responsible lending benefits us all and that continuing to push at the pricing and criteria margins may be acceptable in the short-term but over the course of time may will force you off the cliff edge.
Bob Young is managing director of CHL Mortgages
