According to a new report from independent market analyst Datamonitor, 2008 is proving to be the most difficult year facing mortgage intermediaries, as the credit crunch takes its toll on the UK mortgage market. Intermediaries are seeing a shift in power away from them towards lenders, and Datamonitor predicts a significant fall in their revenues due to lower lending levels and potential cuts in proc fees.
With specialist lending such as sub-prime and self-certification taking a big blow and lenders’ reviewing their distribution strategies, intermediaries will slightly lose market share over 2008 to account for 63% of gross lending, compared to 65% in 2007.
“Intermediaries are definitely facing tough challenges in current market conditions, and we are likely to see an increase in number of exits and more consolidation”, says Karina Purang, author of the report and Financial Services Analyst, Datamonitor.
With less funding available, lenders are repositioning their products and re-assessing their risk. As a result, products are being withdrawn and customers are increasingly being turned down. This has created a very challenging environment for intermediaries where their priority now is securing mortgages for customers rather than trying to negotiate better lending terms and proc fees. With limited supply and relatively strong demand, the market is seeing a shift in the balance of power from networks to lenders.
The credit crunch is forcing lenders to reconsider their intermediary channel distribution. Many are now very selective in terms of their distributors while others are prioritising branches. With significantly lower lending levels this year, intermediaries are set to lose considerable revenues.
While many intermediaries should be able to weather the storm and deal with a fall in revenue, some are currently in a vulnerable situation, particularly those intermediaries who have high fixed costs. With many lenders rethinking their distribution strategy, intermediaries need to step up their services and further strengthen their relationship with their key lenders.
Intermediaries are concerned about lenders moving away from broker distribution
Datamonitor’s Mortgage Intermediary Survey highlights that “lenders pulling way from broker distribution” is the main concern for intermediaries at 53% of responses. However, in Datamonitor’s opinion, this shift is unlikely to have a major impact on indirect distribution and the intermediary channel will continue to remain the major channel of distribution in the UK mortgage market. The second major concern for the intermediaries surveyed was falling commissions, with 50% of participants stating they were concerned about this issue.
As lenders’ margins on mortgages have decreased due to fierce competition, the level of commission paid to brokers has come under threat. Moreover, the fact that funding costs have increased may lead to lenders reducing their proc fees, particularly given that the credit crunch has created a level playing field for lenders and intermediaries. Indeed, HBOS recently reviewed its proc fee levels, with Halifax reducing its fees by 0.03% and BM Solutions by 0.05%. With the biggest UK mortgage lender taking such an action, it is possible that other lenders will follow suit.
Datamonitor predicts that the intermediary market will lose share over 2008
Datamonitor estimates that 65% of total mortgage gross advances were generated via the intermediary channel in 2007. While the indirect channel will continue to account for the lion’s share of mortgage distribution, Datamonitor predicts that they will slightly lose share in 2008 to account for 63% of gross lending given that the liquidity crisis is dealing a big blow to niche sectors in which intermediaries are primarily responsible for distribution, such as sub-prime and self-certification.