Eleventh-hour mortgage changes can be rationalised but better management neededWhy don’t they just ‘price for risk’?
It’s a question that is continually asked by all and sundry when it comes to trying to understand lenders and the way they price their mortgage products. Especially so when there appears to be such a sizeable disconnect to the perceived cost of funds and the pricing.
The very simple answer to that question is, of course, that lenders do price for risk; it’s just the case that risk changes and, in certain market periods such as the one we’re experiencing right now, it can change a lot.
It would certainly be an oversimplification of the seemingly constant changes we are seeing in pricing right now, to suggest that all types of lenders – banks, building societies, specialists, and the like – are running the same playbook.
That’s obviously not the case, because each funds in entirely different ways, each has its own unique commercial consideration around share of market versus volume, plus each has its own credit risk appetite and restriction, and each will have an overall margin it wants/needs to achieve. I could go on.
However, even with those very individualistic areas to consider and take into account, they also have to acknowledge this is a market full of competition, and even those with the best laid plans, those achieving their aims as set out above, can be driven off-course by the decisions of others.
Hence, why lenders who will genuinely have priced for risk with their products, are at the same time having to continually consider their position within the market, and where the moves by other lenders leave them. A market where their competition is likely to number tens upon tens of lenders and (at least) hundreds of other products.
For instance, will their current price points leave them exposed to an influx of business that they are unable to service, if their competitors move? And if this is the case, how best to manage their current position and the business they will receive, while they work out what their moves should be? And just how long will it take them to make those moves and what should be the decision process during that time period, particularly in accepting volume?
Now, I fully concur with some of the criticism that is currently being levelled at lenders around the ways and means by which they are reacting and acting, particularly in terms of the short notice periods being given to the adviser community. A couple of hours grace is never going to be enough and clearly the greater lead-in time advisers can be given, the far better it is going to be for all concerned, not least the adviser themselves and their client.
Plus, let us not forget that some of the action required in this regard is because they have chosen to take in far too much business at the very point that their pricing leaves them exposed when others move out of their vicinity. The point I was making about how they handle those periods between making the decision to change pricing and what they will accept on the current rates.
Operationally, I don’t think it is too strong to say that some lenders can get themselves into a right mess when making these decisions. Don’t get me wrong, I know full-well that resource is currently at a premium and has been for some time, and many lenders are trying to get their resource levels up to match the service they offer with the business they are receiving.
However, again, with slightly better management of this, they can do themselves – and advisers/clients – a real favour. Again, let’s be honest, it’s not like they’ve never done this before and, while I fully appreciate this current market is perhaps more ‘fluid’ than others, the fact that rates are changed and competitors shift quickly, should not be a surprise to anyone who has spent very long in our market.
We are not breaking new ground here. This is a fact of mortgage life, and all stakeholders, but particularly lenders, should be able to draw upon their experience to find ways to make the process as smooth as possible. To ensure advisers have enough time to place business and they do not swamp themselves with too much.
Advisers (and distributors) recognise the challenge to be faced but we have been here before. Let’s act like we remember.