Mortgage Customers: How to Square a Vicious Circle

Roger Miles and Tony Moroney write about the mortgage market and ‘good behaviour’ among borrowers and providers, and provide a set of questions for boards.

The greatest lesson of financial market history is a paradox: we don’t learn from financial market history. What was true of the early 1990s wave of destructive price competition has become true again. With mortgage market profitability declining and returns on risk-adjusted mortgage assets diminishing, fair treatment of existing customers suffers. The whole edifice could implode, possibly as early as next year. When that happens, we might just hear, against all the foreground noise, a small voice of reason reminding us that market fundamentals will always suffer when everyone buys into the euphoria of writing new business—and then, of course, regrets it.

We are in an era when mortgage marketing is a performative activity, conducted by groups of managers in separate silos—for product development, sales, pricing, credit and underwriting—selling on ever-narrowing margins.

Is it unreasonable to suggest that a mortgage market correction is coming soon? Isn’t one of the rules of the euphoria game that no one should break the spell by voicing concern?

Perhaps we could ask a different set of questions. What if someone showed that you didn’t have to play that game and suffer the consequences? Wouldn’t you want the chance to avoid the losses and reap the benefits?

This paper will challenge the recent euphoria of the mortgage market and invite a reassessment of what ‘good behaviour’ should look like among both borrowers and providers. Without this, the crisis will loom larger until the wave breaks, destroying many of the market’s optimistic assumptions. The paper will also suggest a set of questions for boards to work their way out of the maze.