Mortgage Lender Behaviours Risk Regulatory Intervention
Fair treatment of existing customers is a challenge made harder by the current decline in mortgage profitability. Return on risk-adjusted mortgage assets is declining; lenders are beginning to repeat past patterns of unsustainable behaviour. The market is liable to implode, possibly as early as next year according to a white paper published by Berkeley Research Group, Mortgage Customers: How to Square a Vicious Circle.
“We are in an era when mortgage marketing is a performative activity that is principally created to distract attention from an underlying lack of progress”, says Dr Roger Miles, managing director of Behavioural Risk at BRG. “In 2014, the Big Six lenders originated a total of £147.3 billion to see their book grow by a mere £13.5 billion. The market cannot support these levels of inefficiency without fracturing soon”.
The comments are part of a paper which examines the multiple pressures in the mortgage market as lenders strive to offset falling back-book profitability by constantly seeking new mortgage business.
Dr Miles continues: “The UK mortgage market’s problems arise from a set of biases and assumptions so deeply ingrained that, without realising it, many providers have now reached a crisis point.
“Many providers have taken comfort in repeating past patterns of behaviour which are unsustainable: rolling over questionable interest-only contracts; ignoring the bubble nature of buy-to-let and charging existing customers more because they can”.
Tony Moroney, managing director of Governance, Risk and Culture at BRG, added: “These challenges are compounded by new competition such as the challenger banks who in the main are unimpeded by large back books. New consumer regulations compel providers to pay closer attention to customers’ needs throughout their relationship and not just at the point of sale, yet boards appear to remain wilfully blind to this.
“Constantly striving to deliver new mortgage business to offset falling back-book profitability essentially creates diminishing returns and reduces the quality of a bank’s mortgage assets”.
A new approach is required by boards and executives which will:
- Optimise pricing: using more nuanced diagnostics to get the best value out of wholesale cash, whilst also delivering value to customers
- Optimise ‘behaviour-based pricing’: going beyond price optimisation and maximising profits, into lending correctly based on a real understanding of customer needs and preferences
- Optimise the balance sheet: improving return on capital by focussing more carefully on sourcing and retention of mortgage customers to build sustainable enterprise value