Five years in the making, much has been made in the media recently of the MMR (Mortgage Market Review) and the changes that came into effect on the 26th April 2014. The need for a review was established in the wake of the financial crisis, during which time repossessions were rife and the irresponsibility of previous lending practices brought the credit market to its knees.
In providing innovative online services designed to reduce risk and improve efficiencies in property transactions for all parties, TM Group are well placed to take a look at what the MMR will mean for the property market.
TM Group’s New Business Development Director Nick Dyoss, Account Director Jon Horton and Sales and Marketing Director Ben Harris (pictured left to right, below right) offer their thoughts…
For conveyancers – Answer our poll: what impact do you think MMR will have on your firm?
JH: In my view MMR will inevitably slow down the mortgage offer process as more customer affordability checks are done and so, from a conveyancer’s perspective, one can expect to see client files take longer to reach completion.
Could MMR flush out the over expectant borrower at an earlier stage? In the short term I doubt it, which is why earlier financial advice is the best way of managing a home buyer’s expectation and mitigating the risk of a collapsed chain because the mortgage required is beyond reach.
So with the increased time it may take to reach exchange brings an increased risk of a chain falling apart for numerous reasons, something that conveyancers and estate agents have always been challenged with. There are policies that conveyancers and agents can offer to the consumer to insure against the loss of fees in the event of the transaction becoming abortive for reasons beyond their control.
ND: Conveyancers will notice a disruption to their case load for the first 2-3 months as the extended vetting process will delay homebuyers in getting approved. Thereafter, you can expect case volumes to be slightly lower than usual.
Importantly though, as lenders become more stringent in applying their terms and conditions, residential conveyancers will need to be getting their houses in order, if they haven’t already, and should be making sure that they are using tools to prove CML compliance.
JH: In the past, the savvy homeowner might have had a broad idea of income multipliers (such as 3 x main salary and 1.5 on second applicant, or 2.5 x joint) and a view of how much equity could be injected in to a new purchase, but MMR has put an end to that since lenders now have to use more probity in the underwriting process.
A good estate agent will provide a degree of certainty in so much as what is an achievable sale price and therefore the equity calculation can be better assessed at the outset but, as far as how much can I borrow, that has become harder to predict with the implementation of MMR.
The key thing is for the consumer to be given advice at the earliest possible stage so that they have a realistic view of how much they might be able to borrow before they embark on a property search. In reality we know this doesn’t happen very often with exception perhaps, to the first time buyer. Why? Because it’s the emotion of seeing a property on the market, whether by walking past the estate agent’s window, browsing the local paper or whilst out and about in general, that often triggers the desire to move.
ND: Irrespective of how each lender chose to interpret the new regulations, consumers will find the mortgage application process longer, more involved and probably more expensive. The new focus on household expenditure on a range of things including child care costs and how many times you eat out may well be seen as intrusive and unnecessary so it will be down to the lenders to help educate consumers about MMR. However, MMR should bring a number of benefits to consumers. Aside from the obvious benefits around sound financial analysis and lending suitability, it may encourage consumers to get a mortgage first before commencing their house-hunting. This would certainly help speed up the process once the conveyancer is instructed.
For mortgage lenders
ND: Quite simply any measures that help to prevent an economic catastrophe like the one in 2008 must be a good thing. Inevitably the increased due diligence will mean that mortgage set-up fees will rise but a major benefit of the new approach is that it will help to take some of the heat (perceived or not) out of the current housing boom which should make it more stable and sustainable.
JH: Lending is how they profit so MMR shouldn’t be viewed as the grim reaper! The overall housing market is showing good signs of recovery so this is good news for the lending community. What’s different is the application of a layer of regulation that dictates better processes and better lending decisions that are in the interest of both the lender, the consumer, and for some, let’s not forget the saver! With any process change there will be a period of bedding down new rules so in the immediate term I would not be surprised to see the application to offer process taking longer.
In the past, the savvy homeowner might have had a broad idea of income multipliers (such as 3 x main salary and 1.5 on second applicant, or 2.5 x joint) and a view of how much equity could be injected in to a new purchase, but MMR has put an end to that since lenders now have to use more probity in the underwriting process.
For estate agents
JH: The corporates and larger independents already steer the vendor to sit down with a financial consultant and undertake a preliminary affordability assessment as part of the process in marketing the property. This is good practice since lenders can provide decisions in principle within minutes albeit they’ll often leave a footprint on the clients credit file as a credit check is usually undertaken as part of the process.
Whilst the DIP is helpful in managing borrowing expectations it cannot be seen as a guarantee of final approval or in procuring a quicker formal offer. Once the final mortgage application has been submitted, the lender will have to apply their new found underwriting rules and processes and this cannot be completed until the property has been found.
A good estate agent will provide a degree of certainty in so much as what is an achievable sale price and therefore the equity calculation can be better assessed at the outset but as far as ‘How much can I ultimately borrow?’, well that has become harder to predict with the implementation of MMR although one can expect more certainty over the medium term as MMR beds in across the lending community.
BH: 2014 has been an encouraging year for estate agents so far and despite the challenges of a shortage of supply the outlook for the rest of the year is looking positive. As always there are obstacles to overcome and MMR may turn out to be one of them but at most is likely to be the difference between a very good 2014 and a very, very good 2014.
With the current shortage of stock, most sellers are able to choose the purchaser they think is in the best position to proceed and so the issue of lengthening of the process and some buyers falling foul of stricter criteria is likely to have limited impact.
In recent years, estate agents have switched their primary focus of selling additional services over from Mortgages to Conveyancing – with the home moving trends survey of 2013 reporting that 46% went with their estate agent’s recommendation on conveyancer but only 13% sourced their mortgage via their estate agency recommended route.
No doubt agents will want to use this change to return to selling financial services as early on in their client interaction and present a compelling case for those searching for properties to increase the amount of work done upfront ahead of the lender applying their new found underwriting rules and processes.
So what impact do you think the Mortgage Market Review will have on your conveyancing firm? Let us know! Answer our poll today.
For further information on the Mortgage Market Review, please consult the Financial Conduct Authority’s website.