When Covid struck the whole of the UK housing market stopped. Builders, estate agents, valuers and removal firms could not operate and they had to go into lockdown. Like most of the UK they were facing into the unknown and many of these businesses placed even their most skilled and qualified staff onto furlough. Mortgage brokers were no different with about 40% of the 16,000 mortgage and protection advisers asked to stop work, with the remainder all adapting to working from home. By utilising technology, they gradually embraced their client base to help them get great remortgage deals and provide more general advice even when the housing transaction market was shut.
Mortgage lenders were facing into a different set of issues. They were having to deal with two significant impacts. Firstly, the Chancellor, Rishi Sunak, bounced the banks into mass payment deferral programmes, starting with mortgages. This gave them a huge administrative headache as they had to find a way to deliver these changes very quickly. The Chancellor also indicated that this would not impact a consumer’s credit score. Secondly, at the same time, lenders had to move the bulk of the administrative and processing staff to home working, and some lenders lost their overseas processing capacity entirely as India was in full lockdown. Most lenders have now got around 20 to 25% of their staff administrative teams back in offices complying with social distancing, but this carries its own risks.
It is much easier for small firms to bring their workforce back with distancing. Large lending entities (banks) have different risk measures. They are expected to fully assess the challenges under Health and Safety legislation and be able to put in place appropriate controls and barriers. Most large firms have to assess how they would be treated if they facilitated a mass outbreak within their workforce. So whilst they can get some capacity back where people can drive to work and keep distanced, this leaves most working from home on a table with a laptop which is nowhere near as efficient as the technology they have in their office. All activity must be screen based with no paper files. This adds complexity and makes them much less efficient. Even with all the work force back in an office or with home working most see themselves at about 70% efficiency. This is the same for conveyancers and also for surveyors who are making fewer visits per day to avoid the risk of contamination.
The work done by trade bodies and firms in May to get the property market to the top of the Government list to be re-opened was of the highest quality. To witness builders, estate agents, valuers, conveyancers, removal firms, lenders and brokers coming together and promoting sensible working practices was a real pleasure. Firms have now completed the activity to clarify and deliver the sales which were in the pre-lockdown pipeline and get new properties to market. However, agents and advisers have to work safely, and where advice can be delivered remotely, this remains the preferred approach.
The housing market has bounced back surprisingly well. The main property search tools, Rightmove and Zoopla, are reporting record levels of enquiries. Estate agents are also reporting levels of enquiries from both sellers and buyers substantially higher than in the first quarter of 2020. Most significant is that agents are reporting asking prices which are higher than in Q1. This is leading to mortgage brokers being busier with all types of enquiries, purchase, remortgage or for a new rate with their existing lender. However, one of the biggest barriers is the lack of deals above 85% loan to value. Unlike previous mortgage droughts which might have been based on issues with lender capital or liquidity, this is not the case this time. Lenders have enough applications for loans arriving to totally use up their processing capacity and no ability to process more. They are unlikely to open up higher loan to value unless they want to take some higher risk lending at higher interest rates. But this will be in place of other loan types, not in addition to, for the foreseeable future. One area of concern is that prior to lockdown lenders approved about 80% of applications received. Currently this looks closer to 65%. Lenders are taking a more conservative view on applicant income and other debts and it is taking time for brokers to fully understand what lenders’ amended criteria are. This makes it even more important for consumers to talk to a broker who understands the market rather than to try to traverse it alone.
The market has not been helped by the temporary loss of what are known as non-bank lenders. These are challenger institutions who do not hold consumer deposit accounts and are funded via “wholesale markets”. The crisis brought them to a halt as customers taking payment deferment slowed their cash flow and their funders wanted to “wait and see”. Funders are back and there is more certainty about the volumes of deferral. This is good news for those who are not “standard borrowers”.
The road ahead will have bumps as the economy tries to re-invigorate and some individuals and firms will be casualties. Good news however is that whilst nearly 2 million people asked for a mortgage payment deferral, over 9 million did not and have still been making their monthly mortgage payments. Early feedback is that perhaps as many as half of those who took a deferment did so as a precaution to help cash flow, not because of direct need. Also, whilst nearly 10 million people have been furloughed, 75% of the workforce has remained fully employed and paid. As furlough ends in October, the numbers being made redundant will be critical to the economy and whilst individually damaging and regrettable, there will still be large numbers employed and spending. Some think that the bigger proportion of issues will be in the rental sector, not the owner-occupier group.
Consumers of all types will need information, help and advice as never before. Those coming out of mortgage deferment must make constructive decisions fitted to their individual circumstances. Keeping insurances on risk is also a key component of the good advice that consumers can get from a mortgage broker. Being on the front foot and making proactive contact whether that is broker to client or client to broker will help all be better able to survive these traumatic times.
One area that is likely to remain hotly contested is that in May 2020 on the “Gov.uk” website, Treasury set out its views that “payment holidays and partial payment holidays offered under this guidance should not have a negative impact on credit files.” To a consumer that means a free lunch with no comeback. However, the FCA position since late May has been that whilst credit files may be clear, lenders may use other sources to assess creditworthiness. Therefore, assessment of changes to income, expenditure, indebtedness or types of debt are permissible factors to meet the regulator’s responsible lending requirements.
So despite initial government rhetoric that payment deferral would not impact individuals, we are seeing this have deeper ramifications. Most lenders are now looking wider than the credit score to assess future affordability and taking in other aspects including furlough, use of Bounce Back Loans, mortgage and unsecured credit deferral and other aspects to assess whether a loan is affordable or appropriate. The Association of Mortgage Intermediaries continues to challenge this with the FCA on behalf of the consumers whose interests we serve, but it is important that advisers check credit files where customers have deferred payment on either mortgage, loans or taken other credit. This is going to be a difficult conversation, but customers should only have been using these benefits in cases of genuine need.
However, looking at this through a different lens, lenders offered the option to defer and we now see borrowers who have taken support be viewed differently. It was and is a choice on both sides. But we risk consumers not looking at the industry kindly. Government gave the impression that it would not adversely impact consumers and it risks creating a new set of mortgage prisoners before we have liberated the group created by the last crisis. The new Chief Executive elect of the FCA addressed this at his Treasury Select Committee appointment hearing and stressed it will be an area of focus once he takes over. His senior management team which he wishes to empower might want to be thinking of that before he arrives.
The next year will be a challenge for us all. The housing and mortgage market will be the same. My words to lenders and consumers are to use a mortgage broker who will help ensure good advice on the best solutions for all.
Robert Sinclair, AMI