THE MORTGAGE EVENT THE MORTGAGE EVENT

ManchesterManchester23 September 200523 September 2005

Adrian ColesAdrian ColesDirector-GeneralDirector-General

The Building Societies The Building Societies AssociationAssociation

THEMESTHEMES

Housing is more important than everHousing is more important than ever Low house price inflation enhances Low house price inflation enhances

skills requirementsskills requirements Declining marginsDeclining margins Regulation of “fairness”Regulation of “fairness” EuropeEurope Government schemes are relatively Government schemes are relatively

unimportantunimportant

HOUSEHOLDS’ FINANCIAL ASSETS HOUSEHOLDS’ FINANCIAL ASSETS 20042004

20042004 Increase Increase since 1996since 1996

£bn£bn %% %%

Insurance and Insurance and pension policiespension policies

1,6681,668 5252 5656

DepositsDeposits 825825 2626 7474

EquitiesEquities 359359 1111 1313

Mutual fundsMutual funds 143143 44 7272

SecuritiesSecurities 5151 22 2424

CashCash 3434 11 7979

OtherOther 100100 33 5757

Total financial Total financial assetsassets

3,1793,179 100100 5353

HOUSEHOLDS’ BORROWING HOUSEHOLDS’ BORROWING 20042004

20042004 Increase Increase since since 19961996

£bn£bn %% %%

Short term loansShort term loans 184184 1515 130130

Long term loans Long term loans secured on secured on dwellingsdwellings

875875 7373 114114

OtherOther 135135 1111 117117

Total LiabilitiesTotal Liabilities 1,1941,194 100100 117117

TOTAL HOUSEHOLD WEALTHTOTAL HOUSEHOLD WEALTH

Household AssetsHousehold Assets 20042004

£bn£bn %%

HousingHousing 3,2213,221 4646

Insurance and pension policiesInsurance and pension policies 1,6681,668 2424

DepositsDeposits 825825 1212

Other non-financialOther non-financial 608608 99

EquitiesEquities 359359 55

Mutual fundsMutual funds 143143 22

Other financialOther financial 100100 11

SecuritiesSecurities 5151 11

CashCash 3434 --

TotalTotal 7,0087,008 100100

HOUSEHOLDS’ TOTAL ASSETS 1996 HOUSEHOLDS’ TOTAL ASSETS 1996 %%

Housing - 34%

Insurance &Pensions - 30%Deposits - 13%

Equities & MutualFunds - 11%Other Financial -4%Other Non-financial- 8%

Total assets: £3.6 trillion

HOUSEHOLDS’ TOTAL ASSETS 2004 HOUSEHOLDS’ TOTAL ASSETS 2004 %%

Housing - 46%

Insurance &Pensions - 24%Deposits - 12%

Equities & MutualFunds - 7%Other Financial -2%Other Non-financial- 9%

Total assets: £7.0 trillion

HOUSEHOLD WEALTH: THE HOUSEHOLD WEALTH: THE OVERALL POSITION 1996-2004OVERALL POSITION 1996-2004

0

1

2

3

4

5

6

7

8

Total AssetsTotal LiabilitiesNet Wealth

£ tr

illi

on

LOW HOUSE PRICE INFLATIONLOW HOUSE PRICE INFLATION

No boom, no crash. Highly No boom, no crash. Highly unusual.unusual.

Premium on skills –Premium on skills – UnderwritingUnderwriting ValuationValuation Borrowers’ risk assessmentBorrowers’ risk assessment

Real debt repayment. Today’s Real debt repayment. Today’s generation of borrowers will be the generation of borrowers will be the first to repay their mortgage loans.first to repay their mortgage loans.

DECLINING MARGINS IN BUILDING DECLINING MARGINS IN BUILDING SOCIETIESSOCIETIES

Income, Expenditure and Surplus 2001-Income, Expenditure and Surplus 2001-20042004

Per cent of mean assetsPer cent of mean assets

Net Net InteresInterest t IncomeIncome

Other Other IncomIncomee

ProvisionProvisions and s and losseslosses

ManagemeManagement nt expensesexpenses

CorporatioCorporation Taxn Tax

RetaineRetained d SurplusSurplus

20012001 1.421.42 0.340.34 (0.00)(0.00) (1.06)(1.06) (0.21)(0.21) 0.500.50

20022002 1.261.26 0.400.40 (0.08)(0.08) (1.04)(1.04) (0.15)(0.15) 0.390.39

20032003 1.241.24 0.370.37 (0.09)(0.09) (1.04)(1.04) (0.14)(0.14) 0.340.34

20042004 1.131.13 0.430.43 (0.05)(0.05) (1.02)(1.02) (0.14)(0.14) 0.360.36

NARROWING MARGINS: OPTIONSNARROWING MARGINS: OPTIONS

Travel along the risk curve to Travel along the risk curve to expand the marginexpand the margin Sub primeSub prime Self-certSelf-cert Buy-to-let, etcBuy-to-let, etc

Expand other incomeExpand other income Diversify into new areasDiversify into new areas Diversify within financial servicesDiversify within financial services

NARROWING MARGINS: OPTIONS NARROWING MARGINS: OPTIONS Cont’dCont’d

Concentrate on what you’re good Concentrate on what you’re good atat OriginationOrigination AdministrationAdministration FundingFunding

Cut, or spread, costsCut, or spread, costs Accept reduced profitsAccept reduced profits

““FAIRNESS”FAIRNESS”

Treating customers fairlyTreating customers fairly Product designProduct design PromotionPromotion TargetingTargeting Staff remunerationStaff remuneration After sales serviceAfter sales service ComplaintsComplaints

Unfair Terms in Consumer Contracts Unfair Terms in Consumer Contracts RegulationsRegulations

Unfair Commercial Practices DirectiveUnfair Commercial Practices Directive

““FAIRNESS” Cont’dFAIRNESS” Cont’d

FOS: “Fair and reasonable in all the FOS: “Fair and reasonable in all the circumstances”circumstances”

Consumer Credit Bill: “Unfair Consumer Credit Bill: “Unfair relationship” test in relation to relationship” test in relation to second mortgages, unsecured second mortgages, unsecured lendinglending

Which? proposed Code on “Fair and Which? proposed Code on “Fair and responsible practices”responsible practices”

Banking Code: “We promise that we Banking Code: “We promise that we will act fairly and reasonably in all will act fairly and reasonably in all our dealings with you.”our dealings with you.”

EUROPEEUROPE

EU expectation of growth in cross EU expectation of growth in cross border lending – “integration” border lending – “integration”

Wide differences in –Wide differences in – Types of mortgageTypes of mortgage Consumer protection regimesConsumer protection regimes Early repayment fees, interest rate caps, Early repayment fees, interest rate caps,

interest rate variationsinterest rate variations Valuation practicesValuation practices Access to credit databasesAccess to credit databases Land registry practiceLand registry practice Debt recoveryDebt recovery

Green paper out nowGreen paper out now UK market already the most complete UK market already the most complete

and largest – so little to gainand largest – so little to gain

GOVERNMENT INITIATIVESGOVERNMENT INITIATIVES

Equity sharingEquity sharing Key worker initiativeKey worker initiative Real Estate Investment TrustsReal Estate Investment Trusts

THE MORTGAGE EVENT THE MORTGAGE EVENT

ManchesterManchester23 September 200523 September 2005

Adrian ColesAdrian ColesDirector-GeneralDirector-General

The Building Societies The Building Societies AssociationAssociation