Rebooting the mortgage market

Ian Larkin began his new role as chief executive officer of UK-based online mortgage broker Trussle on 9 March, just as the country moved towards lockdown – a challenging time even for someone established in their tenure. But, as he says, there’s still much to think about and work on in the mortgage market, which although recently reopened by the government, is likely to be on the go-slow for some time.

The market was changing rapidly before COVID-19. ‘The whole value chain for the way financial services are provided to customers is changing for many different reasons’ Larkin says. Rather than one big provider dealing with a transaction end-to-end, there is now a growing move towards disintermediation in some ways and intermediary platforms that develop links to big lenders in others.

The pandemic has been a ‘jolt to the system’, because it has shown that the mortgage market does not have as much resilience as many previously thought. It has basically had to shut down and adjust to different ways of working and reviewed issues of security, although it has adapted quite well in recent weeks and is now preparing for the market to restart following the government’s announcement that house moves may now take place. Transactions that were in progress appear to be continuing in the main, and although exchange dates have been moved back and some chains have collapsed, Larkin’s view is that many appear to be proceeding and lenders are holding to agreed mortgages.

Some post-lockdown activity has continued, with automated valuation models helping with more standard properties in high turnover areas to be valued without a site visit. Perhaps understandably, remortgaging activity is quite busy – rates are low and homeowners may be looking to save money either for a move upwards or simply to help them through a tough financial period.

What next?

Coming out of lockdown, there is no doubt that the economy will be not be in a healthy state, with low growth, high government debt, and the possibility of resultant high taxes – and a healthy property market needs economic growth. However, there will be a backlog of people who need to relocate, and this process should be unleashed as barriers come down, allowing at least some movement on the market.

Larkin suggests that with the pre-existing downward trajectory of home ownership, the government may need to relax planning laws to allow creation of the affordable homes that could fix the mismatch between supply and demand, especially in cities. It should also, in his opinion, look to extend Help to Buy. Intergenerational inequality and younger generations looking set to become worse off than their parents is a problem vital to address by helping first-time buyers and second-steppers, he believes. The government should ensure that policies are geared to preventing this becoming even more entrenched after COVID-19, leading to further decline in ownership.

Tech solutions

Technology also has a vital role in improving access to finance, as well as ensuring a healthy and competitive market by levelling the playing field that, for Larkin, currently disadvantages the challenger lenders and services. The government could also help by legislating to create a broader market once it can reopen, and Larkin foresees that with the choppy waters ahead, the government may feel more empowered to intervene in ways it has been shy of in the past, for example in how and where land is released for home building.

Open banking, which allows third-party developers to build applications around a financial institution’s services, could offer some new solutions. While working at Lloyds, Larkin experienced the ability to see daily risk updates about borrowers, including notable changes in expenditure, which allowed them to flag up risks. Many people have multiple bank accounts today, but open banking protocol would allow lenders to read customers’ situations much better and ensure customer data is kept secure, while keeping the principle that the data belongs to the customer, not financial institutions. It  has not yet been fully embraced by lenders, but the technology is there – lenders could  ‘take more risk than in the past but use technology to manage it better’ says Larkin, and open up lending to more people.

This data-driven approach could also address the historical problems of the loan-to-value ‘pendulum’, as Larkin puts it, swinging too far one way or the other. This can lead to 110% mortgages at one extreme, to buyers not being allowed to borrow at monthly repayments that were far lower than the rent they have paid reliably for many years at the other.

Larkin cautions that while this market shutdown is unprecedented, the industry has to consider what to do if something like this happens again. Business resilience and continuity planning will be vital for the future. The technology is there to enable more tasks and meetings to be conducted remotely, and the mortgage industry, like all others, has been forced beyond considering new ways of doing things into actually having to do them.

When light does appear at the end of the tunnel, it appears that technology and perhaps some radical thinking around planning and development will be required to really get the market moving again.