With the MCD having already been adopted by the second charge market Christine Toner considers what the ole of the master broker look like in the new mortgage world
After months of preparation and speculation the second charge market commenced operating under MCD regulation on February 15 – a move agreed on by the lending community in order to avoid any issues with pipeline cases. Within days the rest of the industry will have followed suit and all of the issues that have been talked about and analysed over the past year will come to fruition. One of which is the need for mortgage brokers to embrace seconds.
Brokers can do this of course in one of three ways. They can choose to access second charge lenders directly, they can partner with an experienced second charge packager or they can decline to offer seconds at all. The third option will mean the broker loses his independent status so, for many intermediaries who value the whole-of-market title, this won’t be a viable option. According to Steve Walker, managing director of Promise Solutions, however, the first option may not be viable either.
“It’s not a practical solution, at least in the short-term, for brokers to sell direct because there simply aren’t enough lenders geared up to handle it,” he says. “The advice process is complex and relying solely on a sourcing system is dangerous. Our sourcing system is very detailed and intricate but an expert underwriter is still going to spot things that sourcing systems simply don’t”.
Walker believes that even if more lenders were ready and able to take second charge applications direct from brokers this wouldn’t be the best scenario for anyone involved, not least consumers.
“It would lead to bad outcomes,” he says. “There is no substitute for an experienced underwriter. An adviser with access to a sourcing system may deduce that Product A is the best outcome for a client however once they’ve spoken to an underwriter, who understands this sector and knows what lenders are looking for, will be able to make suggestions that could mean the client is able to access a completely different product which is much more suitable to their needs.”
“There’s no getting away from it, secured loans are a specialist sector and needs to be handled by specialists”.
Ryan McGrath, chief executive of The Loans Engine agrees that a lack of expertise on the part of the mortgage broker could present problems.
“The big issue comes for those first-charge mortgage brokers that have never offered or embraced second-charge mortgages before,” he says. “To provide a quality TCF experience for the client requires second charge know-how, knowledge, experience and relationships, which most are unlikely to have – certainly nowhere near what a master broker can offer in this sector. I therefore tend to think that the best option for mortgage brokers will be to refer – it may well be that, for example, the remortgage option is still the best one for the client, however being able to provide a real and true second charge mortgage quote and comparison, in order to get to that remortgage recommendation, is vital.”
McGrath says that in the MCD world, it’s quite likely that nine out of 10 customers are still probably going to be moving down the remortgage route; however, he adds, the important point for mortgage brokers is to make sure they get everything they need from a compliance perspective, to ensure they are making the right recommendation.
“After all, if one in 10 will be better off with a second-charge, the intermediary is going to need to secure accurate quotes themselves, or through the master broker, to back up their advice and the recommendations they make,” he says. “Far better, one would think, to use a specialist in this area rather than relying on your wits and potentially getting it wrong.”
Interestingly, then, whilst the possibility of mortgage brokers selling direct could lead some to speculate that the role of the master broker will be reduced it seems, in fact, that the opposite will occur.
“The need for packager/distributors will increase not decrease,” says Tony Salentino, director, Complete FS. “Lenders need a cost effective way of reaching and managing distribution and brokers require proven centres of expertise to guide them through the choices. Those master brokers who are not prepared to adapt however, will find life very difficult as regulatory requirements will change the landscape.”
Master brokers, particularly those that provide a packaging or distribution service, will be in demand and, McGrath says, it’s important brokers know what to look for when choosing one.
“There is a degree of competition in the specialist master broker sector, but there are some clear differentiators out there which mortgage brokers should certainly take note of if they want to be able to keep providing excellent levels of service to their client, and be able to cut down on any increase in administration and bureaucracy,” he says. “Certainly, having a master broker who is at the top of their game in terms of technology, systems and service is paramount – and as mentioned earlier, the accuracy of second charge quotes is going to be all-important once the MCD is implemented.”
McGrath says to have accurate quotes brokers will need a system that has access to all lenders and, rather importantly, uses credit bureau data to ascertain whether the client is acceptable to the lender for a specific product.
“Without this, mortgage brokers will essentially be operating a finger in the air exercise and they’re not going to be able to compare different product options effectively,” he says. “They’re certainly not going to have the reliable information they need to give the right recommendation.”
MCD regulation may dictate that first charges and second charges are indistinguishable, but those operating in the sector say there are clear differences in the way the mortgages are sold that can’t be ignored.
“Whilst the regulation of first and second mortgages has been brought into line with one another, the processes involved in getting a second mortgage completed are fundamentally different,” says Marie Grundy, managing director of V Loans. “This is where master broker firms can provide an important resource. The key point to bear in mind is that many master broker firms can now bridge the advice gap for those intermediaries who do not yet want to advise on second charge mortgages as well as offering products which are only available through specialist distributors.”
Going forward, says Grundy, master brokers can prove their worth not just to brokers who want to refer seconds but also those who want to advise on them.
“For those broker firms who do decide to leave seconds out of scope, partnering with a master broker would enable them to still continue to offer second charge lending options to their clients whilst passing on the compliance responsibility for the advice process to their master broker partner,” she says.
“Master broker firms can offer tailored service levels for those intermediary firms who do want to advise on seconds, but would also benefit from using the services of experienced second charge underwriters to determine the products available to the borrower based on their specialist knowledge of this lending market. In addition, master broker firms can then go onto provide administrative services to ensure if a second charge mortgage is recommended, the application is processed to completion stage on behalf of the intermediary and their client.”
Harry Landy, Sales Director of Enterprise Finance
Whether brokers start going direct to secured loan lenders themselves depends on their scope of services. Some may choose to simply refer this type of business as it is outside of their scope of service, but for those who have it within their scope of service will certainly start considering it more. If their client is capital raising, they will have to look beyond remortgaging and further advances and start incorporating second charge mortgages into their thinking.
Master brokers still have a lot to offer intermediaries, not least the fact they have access to all lenders as some choose not to deal directly with brokers. This means that if advisers want to regard themselves as truly independent, there will always be a need for specialist loan distributors.