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The impact of Covid 19 on residential mortgage lending

CEO of tmgroup, parent company to estate agents’ sales progression platform mio, Joe Pepper in discussion with Esther Dijkstra, Director of Strategic Partnerships at Lloyds Banking Group and Maria Harris, Director at Digital Cat Consultancy about the impact of COVID-19 on residential mortgage lending.

How have lenders had to adapt?

Esther Dijkstra highlighted two aspects: the operational impact and the shift in banking priorities.  Starting with the operational impact, Esther commented that Lloyds had to step up and “focus on what their customers needed most” which was guidance.  Lloyds were flooded with calls from customers needing help on a range of issues from bereavement to dealing with powers of attorney to managing over a million requests for mortgage and loan re-payment holidays which “presented a significant operational challenge”.

From a lending perspective, Esther said that in early April, Lloyds temporarily withdrew its higher loan to value (LTV) mortgage products to assess the market and re-direct its capabilities to service priorities.  This re-alignment took less than a week during which time Lloyds re-directed all calls from Mortgage Brokers to its Business Development teams to free up operational capacity.

Lloyds then re-launched 85% LTV products having changed the valuation criteria to allow lending based on remote and automated lending valuations which replaced the need, where possible, for physical inspections by surveyors. Esther commented that the operational challenge had been enormous but the move to remote valuations has reduced the time that elapses between the mortgage offer and approval.

Since the re-opening of estate agencies, Esther reported that volumes are slowly picking up, but she highlighted the continued need for patience.  

How have lenders dealt with customers who were due to move?

Esther responded by saying that Lloyds “was able to extend offer periods fairly easily,” particularly in the new build sectorLloyds also prioritised transactions “quickly to get to legal completion’.  Processing over 1 million repayment holiday requests, across mortgages, loans and credit cards, was more of a challenge but Lloyds were able to digitise this process fairly quickly, thereby re-directing the demand.

What impact will employment uncertainty and furlough have on borrowers?

When asked about borrowers who may be facing financial uncertainty, Esther stated that the regulatory principles are the same as they were pre-Covid 19  “The Financial Conduct Authority (FCA) requires lenders to ensure that the borrower can afford to pay the mortgage over the lifetime of the product.”  This places a duty on the borrower or the broker to inform lenders if there is a change in financial circumstances.  At that point, the lender has to confirm that the product is still affordable.  

Esther highlighted that this requirement is no different to pre-lockdown and went onto to state, “I don’t sense that lenders have significantly changed their risk appetite and suddenly become a lot more risk averse.”  

Esther expressed hope that people will bounce back fairly quickly, pointing to the “positive initial signs from the housing market and pent-up demand.” However, she warned “we need to closely monitor unemployment rates as these will be the biggest indicator of what’s to come.”

What view will Lenders take, if someone has been furloughed?

Esther, “we undertake a full review of a borrower’s circumstances when making lending decision so this isn’t straightforward as it depends on lots of factors from the LTV ratio to how long the borrower’s drop in income will last. Different lenders will take a different approach and each customer will have a unique set of circumstances but, ultimately it comes back to the affordability of the mortgage over its lifetime.

Have all lenders been able to adapt in the way Lloyds have?

Maria Harris, Director at Digital Cat Consultancy said there were variations across different lenders. “The first thing that usually happens in response to any crisis is to look at where funding comes from”.

The Bank of England was very quick to respond with the new Term Funding Scheme, so the large retail banks were able to review their liquidity and lending and bring the risk book back very quickly, “it was amazing how quickly that happened.”

For lenders who are wholesale funded or reliant on securitisation, those markets take longer to work things out so there has been polarisation.  There’s also a broad swathe of lenders who are reliant on paper for their originations and totally dependent on physical valuations where their risk models would not allow them to move to automated valuations.  Finally, there are some businesses with offshore operations who went into complete lock-down when all of their outsource arrangements and supply chains stopped.

So whilst there’s been an amazing response from the Government, the Bank of England and from the Lenders who’ve been able to come back really quickly, there’s a long-tail of lenders who still have to work out how they get back to work; how they get back to lending; what their funding model is going to look like and what impact re-payment holidays are going to have on liquidity, risk models, exposure and income.  “There is a long way to go before we see how all the lenders are going to respond”.

Will this have a long-term impact on how banks operate?

Maria responded that she has seen “more digital transformation in the first two weeks of lockdown than in the last two decades.” This has been a “moment of realisation for many businesses, from lenders through to valuers, who’ve recognised that they can change. As a result, Maria is forecasting a big increase in interest in longer-term tech solutions such as open banking data. “Firms are definitely looking at what the longer-term plan is and how they support a more agile work force.  Some of the big banks have already come out and said they can’t envisage a return to a central HQ with 7,000 people in one building”.

Despite this, Maria is fearful that businesses will look back at the experience as a “crisis management response,” reverting to the pre-lockdown way of operating as they focus on recovery and put transformation on the back burner.  She said that this would be a “huge missed opportunity to transform and take advantage of the solutions we’ve developed that make transactions safer and better for customers and lenders.”

What are some of the key digital changes that we need to have in the residential property sector in the short-term?

Maria responded that “removing paper from the transaction, particularly in relation to verifying identity and Anti-Money Laundering checks is key” During lock-down, businesses have been forced to use new tools to enable digital ID checks.  Maria hopes that now firms appreciate how effective those tools are, when combined with the positive impact on the customer journey of checking ID at the start of the process and then sharing the data across the chain that businesses will continue to deploy them. 

Esther added “some changes that have been implemented won’t be reversed whilst others will revert back to the pre-Covid process. It will be a mix, but it doesn’t make sense to revert 100% to the pre-Covid world”.

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