21 per cent of borrowers at risk of negative equity

21% of UK mortgage holders borrowed a mortgage Loan to Value (LTV) of 90% or more - potentially putting them at risk of negative equity according to new research.

In a survey of 2,000 replies, it was found that although the average mortgage LTV borrowed by homeowners is 64%, 3% of mortgage holders had borrowed 125% LTV, 5% had borrowed between 101 and 125%, and 13% had borrowed 91 to 100% of the property's value.

This means that 21% of mortgage holders borrowed more than 90% of their property's value, which could give them an increased risk of negative equity - particularly if house prices continue to fall.

The Financial Services Authority (FSA) has predicted that if house prices fall by 30% from the level they were at the end of 2007, more than two million British homeowners will be in negative equity - this is more of a risk for those who borrowed 90% of the property's value or more, as according to some market analysts, house prices have already fallen by more than 15% in the last 12 months alone.

On a positive note, 19% of mortgage holders borrowed just 20% of the property's value or less, meaning they owned 80% of their home when they bought it.

A further 16% borrowed between 81 and 90% of their home's value, while another 15% borrowed between 71 and 80%. In total, 10% of Brits questioned had borrowed between 61 and 70%.

Commenting, the survey people said: "Our statistics show that, although the days of high LTVs are now in the past, there are a number of mortgage holders out there who did borrow more than 90% of their home's value.

"These homeowners could now be at risk of negative equity as house prices continue to come down, particularly if they bought their house within the last three years," she said.

"However, unless they are planning to sell up, negative equity is unlikely to affect homeowners who can hang on until the market recovers.”

FSA tells brokers to charge fees on direct deals

This is not a subject I have touched on within my blog's until now. For the last few weeks, lenders have been listing products through their branch networks the have undercut those available through independent mortgage brokers, the very brokers that feed these lenders with over 60% of their business, and up to 90% in some cases. To deliberately undercut the very people who have supported them and maintained their profits at a time when times have become hard, it an act of despicable betrayal.

Couple this with the FSA's reluctance to ban such practise, saying that they cannot tell lenders how to run their businesses commercially, it is very encouraging to hear that it was announced that The Financial Services Authority has urged brokers to charge clients a fee for advice when advising them to go direct to lenders for better deals. A spokesman for the regulator told Money Marketing that although chief executive Hector Sants has made it clear that dual-pricing by lenders is not a Treating Customers Fairly (TCF) issue, the FSA is not brushing the issue aside.

Jonathan Fischel, head of mortgages and credit unions department at the FSA, made the statement at the Mortgage Business Expo in Manchester today in an attempt to help solve the issue of dual pricing.

But the joint solution between the Association of Mortgage Intermediaries (AMI) and the FSA did not go down well with brokers in the seminar. Many fear they will soon be out of business if the FSA does not force lenders to offer a level playing field. Mr Fischel says "We have been working with AMI on key issues regarding dual pricing. Most sourcing systems do not show direct-only products. As a broker you could form your own KFI (Key Facts Illustration) and then charge a fee for the advice that you have given. You would not have to include the fee in the Key Facts Illustration. This would result in the customer getting two KFIs, one from the broker and one from the lender. As a broker it would be your job to explain to the customer why you are charging a fee and what the difference between your role and the lenders.” Fischel also told brokers that in order to call themselves whole of market they must disclose to the client that a cheaper deal could be found elsewhere. Of course this just adds to a brokers workload, in time and research telephone calls, with its increased costs.

The Federation of Small Businesses has voiced its support for mortgage brokers over dual-pricing, saying: "It is unacceptable for high-street banks and building societies to be freezing out small mortgage brokers in this way. If there are grounds for complaint by independent brokers to the Office of Fair Trading, the FSB would be right behind them."

Many brokers in the seminar called the solution impractical. One broker said: “Lenders make it as hard for you as possible, it’s impossible. It is just not right to charge the client a fee and then send them elsewhere.”

As an independent mortgage broker, I charge my clients a fee in all cases except for first time buyers - who have enough money to find as it is. I must charge such fees if I want to stay in business (which, funnily enough, I do!). The fee received from lenders for introducing clients to them is low enough, and insufficient to run a business such as mine, and make a half-decent living. For the amount of hours I have to put into each individual case, and the cost of telephone calls, dealing with the paperwork, contacting clients many times during the whole process and then to receive just a couple of hundred pounds for maybe 20 hours of time input would make no business sustainable. To have lenders offer dual pricing makes it more difficult to recommend a broker-sourced deal and puts businesses such as mine at risk. It is encouraging to see that the larger lenders (Abbey and Halifax) have already announced an end (in Abbey's case) and a reduction (in Halifax's case) to such dual-pricing practises. I hope the situation turns around soon, for everyone's mutual benefit.

Tied turns as FSA splits the market

I don't believe that potential borrowers worry too much about the compliance issues that financial and mortgage advisers have to go through. As long as they hear the words such as 'qualified, or regulated, or licensed' most people seem happy enough to accept that the person they seek advice from is suitable to provide the information/advice/ placement service they seek for their own particular needs. However, behind the scenes (from consumers) there is general unrest within the 'advising community' relating to potential changes being proposed by our regulator, the Financial services Authority (FSA)

I saw the following report on an online financial news provider's website today to illustrates the unrest financial and mortgage advisers may soon be experiencing:

"Multi-ties could be stripped of their right to be called advisers as part of a radical shift in FSA thinking which sees the regulator acknowledge the value of whole of market advice.

In its interim report, published this week, the FSA calls for a clear separation between whole of market advice and sales. As part of this move, the FSA says multi-ties could be prohibited from using the advice label and would have to convert to a non-advised sales service or the FSA would have to create a new "simple products" regulatory sales regime. It considers that the prohibitive option may be easiest for consumers to understand.

Other options would be for them to operate under a label such as "sales with persuasion", although it says this would add complexity, or allow them to use the adviser label, which the FSA warns would compromise simplicity.

St James's Place, which operates a model which would fall outside advice, is furious with the report.

Chairman Mike Wilson says: "I do not think for a moment that this will see the light of day. It is incredible to suggest that our advisers are just salespeople and that anyone who sells products from the wider market is giving advice."

Other firms likely to be affected include Openwork, Intrinsic, Barclays, Vision Network and Sesame.

The British Bankers' Association has attacked the report, warning it could limit consumer access to advice, but Aifa has dismissed these concerns.

Director general Chris Cummings says he is delighted the FSA refused to be influenced by banks' vested interests to push through a sales-driven mentality that would have damaged consumer protection.

True Potential managing partner David Harrison says: "It is good to see the FSA recognising that independent financial advice is the only type of advice worth having."

FSA head of the RDR (Retail Distribition Review) Amanda Bowe says: "There is a lot more thinking and a lot more decision-making to do before we say whether we can make a split between advice and sales happen."

The report also suggests that the FSA would continue its work into whether it needs to restrict providers from taking financial interests in adviser firms, with a potential to look at reintroducing "better than best" controls."

I hope you feel better for reading that ! As always, the Financial Services industry is anything but dull.

Today's thing to ponder (an occasional series) :
Before they invented drawing boards, what did they go back to?