January 2015

Damian Riley explains why preparing for IFRS9 now is

important for lenders

Tom Colclough, Goodholm Finance, on why mortgage

borrowers are embracing innovative lending – but which firms

will step up to the plate?

The election of the Syriza party in Greece has caused concern

in the European Union

HML News

Mortgage providers could

see their impairment

charges climb by up to 50%

as a result of a new

accounting standard called

IFRS9.

Damian Riley, director of business intelligence

at HML, explains to Mortgage Finance Gazette

why lenders need to start planning for IFRS9

now.

IFRS9 might not sound as catchy as MMR, but

mortgage providers need to take note. IFRS9

is a new accounting standard that is due to hit

UK mortgage lenders from January 2018.

Why do lenders need to sit up and take

notice? At present under IAS39 (the

accounting standard IFRS9 will replace),

mortgage lenders need to calculate an

expected loss value for just those accounts

that are impaired.

Under the new standards, a lender must

reassess the probability of their customers

defaulting and the resulting expected losses

for all exposures – and this will need to be

carried out each reporting period.

The effort required to implement this will be

significant, from investing in new systems and

processes to bringing your people responsible

for this area up to speed. It‟s certainly no small

task, but it is essential to ensure lenders have

the right impairment provision for written loans.

Why start now?

The new standard introduces a different

provisioning calculation for each one of three

loan groups; performing, performing but

deteriorating, and impaired. In order to have

sufficient information to measure changes

(particularly for the performing but deteriorating

sub-population), a history of measured risk is

required, the benchmark being when the

mortgage assets were taken onto the lender‟s

balance sheet.

This requires a retrospective exercise,

something which cannot be done overnight. The

bigger firms are suggesting that this could take

up to three years for this exercise to be

completed.

Costs to jump by 50%?

A Deloitte survey found that over half of the

banks thought impairment charges could rise by

up to 50% off the back of IFRS9. Smaller

organisations could especially feel the impact,

as they may have relatively few historic default

events to draw upon to work out the likelihood

of accounts defaulting.

One way lenders of all sizes can help make the

transition to IFRS9 as pain-free as possible is

by partnering with a third party with a strong

advanced analytics offering. Rather than a

lender having to overhaul systems and

processes themselves, outsourcing IFRS9

requirements means an organisation simply

needs to provide an account file each month.

With mortgage lending expected to jump and

lenders still getting to grips with the MMR,

outsourcing the tasks needed to meet IFRS9 is

one less administrative headache for mortgage

companies to deal with.

HML News

Specialist Mortgage

Services (SMS), HML‟s

subsidiary, has agreed to

purchase Topaz Finance

Limited (Topaz) from the

Royal Bank of Scotland

(RBS) for an undisclosed

sum, subject to regulatory

approval.

Topaz is the master servicer for approximately

£700 million of residential mortgages held in

the Uropa Series I and Series II

securitisations. SMS is a specialist manager of

mortgage portfolios, managing legal title and

applying its advanced analytics and mortgage

expertise to enhance the performance of

mortgage portfolios on behalf of the beneficial

owners of those assets.

Andrew Freeley, managing director

of SMS, said: “With the recent

improvements in the economy, momentum for

trading mortgage portfolios is building quickly.

Our clients are increasingly looking for a

strategic partner who specialises in managing

mortgage portfolios to support their acquisition

and disposal strategies, to enhance the value

of their mortgage assets and to provide the

rigour and quality required to manage

customers and regulatory risk effectively.

“The acquisition of Topaz supports our

strategy, giving us further scale and enhanced

capability in mortgage portfolio management.

With HML being the clear market leader in

mortgage servicing, the ability to deliver the

most advanced end-to-end mortgage

management solution in the market sets us

apart from our competitors.”

The acquisition of Topaz by SMS and the

development of SMS‟s scale and capability in

mortgage portfolio management is also a key

facet of the Computershare strategy for HML

since its acquisition of HML last year.

Andrew Jones, chief executive officer

of HML, said: “The commitment by

Computershare to grow the loan servicing

business is significant and the acquisition by

SMS of Topaz is an important part of this

strategy.

“The growth of SMS is integral to both

Computershare and HML‟s strategy for 2015

and beyond. We have already benefited from

working with our new parent‟s US mortgage

administration company, Specialized Loan

Servicing, to share our knowledge and

expertise. Further investment into our market-

leading advanced analytics and technology will

enable us to continue our growth plans, meeting

the needs of clients globally.”

Andrew Freeley, managing director of SMS

HML News

Will 2015 be the year of

innovation for mortgage

lenders?

Tom Colclough, founder director of Goodholm

Finance, explains in this exclusive guest blog for

HML why 2015 could be the year that the

mortgage market experiences game-changing

innovation – and why consumers are ready for it.

2014 was an interesting year for the mortgage

industry, with regulatory changes such as the

Mortgage Market Review and the emergence of

some interesting new concepts for consumer

finance. We‟ve seen the growing popularity of

peer-to-peer (P2P) lending and this has gone

some way to help democratise the consumer

finance sector. Another key area of progress is

the Help to Buy Scheme. With legacy issues in

the industry and growing acceptance of new

concepts, will 2015 prove fertile ground for game-

changing innovation??

As we enter 2015, we are seeing there is still a

continued struggle for many first-time buyers to

get on to the housing ladder. LSL Property

Services revealed that the average mortgage

deposit was just over £26,000 in October 2014 –

this shot up to almost £74,000 in London. When

you consider the average monthly rental cost in

the capital is £1,515, it is clear that it can take the

average private renter many years to save a

deposit. Indeed, figures published by Halifax this

month found the average age of a first-time buyer

in London is 32. Between the ages of 18 and 32,

that equates to £254,520 in rent.

Who is innovating in 2015?

With this daunting alternative in mind, it is

understandable why the government‟s Help to

Buy Scheme has proven so popular.

The January statistics show that in the first 20

months to 30 November 2014, more than 38,000

properties were purchased with the support of the

Help to Buy equity loan scheme. Over 31,500 of

these were to first-time buyers, and the typical

purchase price was £211,566. People clearly

understand there are other funding options

available. What could have been classed as

something of an alien mortgage concept has

certainly been welcomed with open arms.

Only recently we have seen the likes of Harrods

Bank and Charter Savings Bank enter the savings

market due to demand for alternative options to

the usual high-street giants. P2P lending

platforms such as Fruitful, Crowdcube and Zopa

are also increasingly becoming viable consumer

finance options with over £2.5 billion having been

invested through them to date. Fruitful, for

example, markets itself as replacing conventional

banks by connecting the money of savers directly

with commercial mortgage borrowers, thereby

helping people on to the buy-to-let housing ladder

and generating more profitable returns for savers.

P2P returns for these mortgages can be up to six

per cent per annum – much higher than the

typical 1.8 per cent attached to savings accounts.

Continued over the page

HML News

Renters in particular resent having to pay rent

when they could be investing in their own

homes instead – the success of Help to Buy

proves this. My company, Goodholm Finance,

firmly believes that innovation is needed here

– the demand is there and savvy firms should

take advantage of this.

Building on the success of Help to Buy

In 2015, we intend to launch our service. We

link investors who want their returns to track

price movements in the property market to

high-quality borrowers who are currently

forced into renting until they can afford a

deposit. We will issue an equity loan to bridge

the gap between the deposit and the available

mortgage for existing homes. This second-

charge loan tracks the value of the property

and does not affect the risk profile of primary

lenders. Buyers get a much-needed cash

injection, investors can benefit from healthy

returns and the primary lender does not need

to worry about increased risk.

Why is innovation important?

Ultimately all markets need competition to

drive efficiency, which is good for economies

as a whole, and to ensure consumers are

offered as much choice as possible. In the

case of the mortgage market this enables

them to get the most appropriate financing for

their needs.

There is still a requirement for large financial

institutions, but they are unable to innovate at

the speed of consumer demand and the

changing market. Understandably, large banks

often hold back from buying into new concepts

until they have seen market reaction, rather

than lead the innovation charge – a situation

compounded even further due to the effects of

the crash.

However, we cannot avoid the fact that

increased consumer demand will enable

more agile and entrepreneurial

companies to step forward and fill the

gaps – and it will be interesting to see

which firms take the lead and put their

heads over the parapet in 2015.

Disclaimer: The views expressed in this

blog are Tom Colclough’s and do not

necessarily reflect those of HML.

It‟s great to see the HML

acquisition by

Computershare as one

of the top 50 events that

defined the trends of

2014, according to

Credit Today.

On the HML acquisition, Credit Today

said "there is clearly a space for third-

party outsourcing", particularly with

lending levels hitting £19 billion in

October alone.

The article noted: "It's not common to

see takeovers and mergers in the

mortgage industry - after all, the UK

market is dominated by the high street

lenders. Mortgage servicer HML's sale to

Computershare by Skipton Building

Society is therefore a rare event indeed."

Credit Today concluded: "The biggest

obstacle to others following

Computershare's example and becoming

third-party servicers, however, is FCA

regulation."

Industry Statistics

*Date reflects what the statistic was during that period, rather than

when the statistic was published

DEC ‟14 NOV ‟14 OCT ‟14

Consumer Prices Index

0.5%

1.0% 1.3%

JAN ‟15 DEC ‟14 NOV ‟14

BoE Base Rate 0.5% 0.5% 0.5%

SEP-NOV „14 AUG-OCT „14 JUL-SEP „14

Unemployment Rate (ONS) 5.8% 6.0% 6.0%

DEC „14 NOV „14 OCT „14

Halifax House Price Index Up 0.9% on NOV Up 0.4% on OCT Down 0.4% on SEP

Average price Average price Average price

£188,858 £186,941 £186,135

Gross Mortgage Lending (CML) DEC „14 NOV „14 OCT „14

Unchanged on NOV Down 9% on OCT Up 5% on SEP

£16.5 billion £16.9 billion £19 billion

Home Repossessions (CML) JULY-SEP ‟14 APR-JUNE ‟14 JAN-MAR ‟14

5,000 5,400 6,400

Industry Statistics

Consumer Prices Index

The CPI decreased by 0.5% on November to

0.5% in December. A continuing decline in

motor fuels prices was a main contributor to

the slowdown of the inflation rate.

BoE Base Rate

The Bank of England kept the base rate at

0.5%, as well as the stock of asset purchases

at £375 billion.

The Monetary Policy Committee voted

unanimously to keep the base rate at 0.5%. In

previous months, Martin Weale and Ian

McCafferty split the MPC 7-2 and wanted to

increase the base rate by 25 basis points.

Halifax House Price Index

The average price of a home increased by

0.9% between November and December to

£188,858. Values in December were 7.8%

higher than the same month in 2013.

Housing economist at Halifax Martin

Ellis said: “The deterioration in housing

affordability as a result of rising house prices,

earnings growth that has been consistently

below consumer price inflation until very

recently and speculation of an interest rate

rise, have combined to temper housing

demand since the summer. The weakening in

housing demand has led to a reduction in both

price growth and sales in recent months. “We expect a further moderation in house

price growth over the coming year with prices

nationally predicted to increase in a range of 3

to 5% in 2015. Housing demand, however,

should continue to be supported by a growing

economy, rising employment levels, still low

mortgage rates and the first gain in

„real‟ earnings for several years.”

Unemployment Rate

The unemployment rate for September to

November stood at 5.8%, representing 1.91

million people.

There were 30.80 million people in work, an

increase of 512,000 compared to a year earlier.

Gross Mortgage Lending

Gross mortgage lending stood at £16.5 billion in

December, unchanged on November but down

1% compared to December 2013.

CML chief economist Bob Pannell

said: "Housing market activity has been

cooling and house price growth slowing in

recent months, but 2014 was still the strongest

year for mortgage lending since 2008. First-time

buyers were a key driver, helped by government

initiatives such as Help to Buy. As a result, the

number of first-time buyers topped the 300,000

mark.”

Home Repossessions

Repossessions declined to 5,000 for Q3 2014,

down from 5,400 during the previous three-

month period, the CML revealed.

This is the lowest number since quarterly

records began in 2008.

Paul Smee, director-general of the

CML, said: “Encouragingly, recent research

also suggests that many households are

preparing themselves for the prospect of higher

interest rates, so we expect any uptick in

payment difficulties to be relatively muted if and

when rates do begin rising.

Top News Stories

.

The UK‟s economy has

grown at the fastest pace

since 2007.

GDP was up 2.6% on 2013 last year, the ONS

has revealed – representing the fastest pace of

growth in seven years. However, between Q3

and Q4, there was a slight slowdown, with GDP

declining from 0.7% to 0.5%.

During the final quarter of 2014, output

increased by 1.3% in the agricultural and 0.8%

in the services sectors. On the other hand,

construction‟s output fell by 1.8%, while

production slowed by 0.1%.

Robert Peston, BBC economics

editor, commented: “How significant is the

slowdown in the British economy, given that the

dominant service sector is still booming, but

construction is shrinking and manufacturing

almost back to flatlining?

“The deceleration is not surprising, in view of

the flatlining of the UK's main trading partner,

the eurozone.

“And two of the negative influences, a fall in

energy supply of 2.8% and in construction of

1.8%, are in industries that tend to be volatile.

That said, it does give pause for thought that

growth is now apparently being driven to a large

extent by retail and consumer spending.”

Meanwhile, Joe Grice, ONS chief economist,

said it was “too early to say” whether the

economic slowdown would continue throughout

2015.

The election of the Syriza

party in Greece has caused

concern in the European

Union (EU).

The left party promised voters it intended to

relax the EU bailout terms, which many in the

country blame for Greece‟s continued economic

difficulties.

Syriza leader and new prime minister Alexis

Tsipras has asked the country‟s creditors to

forgive a third of it‟s more than €240 billion

(approximately £180 billion) debt.

Esteban Gonzalez Pons, head of

Spain‟s Popular Party in the

European Parliament, said: “If we start

playing this game of the more radical you are

the more debt we're going to forgive you, we're

simply opening the door to have the European

Union dismembered.”

EU politicians have voiced concerns that other

countries that have received bailouts, such as

Ireland and Portugal, could also ask for

concessions.

However, Mr Tsipras told his first

cabinet meeting: "We won't get into a

mutually destructive clash but we will not

continue a policy of subjection.”

Following the election, the value of Greek bank

stocks fell, in some cases by more than a

quarter.

Top News Stories

The majority of financial

services companies have

seen a rise in business

volumes.

The latest Confederation of British Industry

(CBI) and PwC Financial Services Survey

revealed that the majority of firms (64%) saw an

upturn in the three months to December.

Business volumes climbed at their fastest rate

since the mid-1990s, although building societies

experienced an unexpected decline. All sectors

experienced profit growth, apart from the life

insurance one.

“Building societies have struggled this quarter,

likely as a result of the impact of the Mortgage

Market Review, constrained buyer affordability

in London and the South East, and stronger

competition in the mortgage lending market. But

a strengthening of household finances,

continued low interest rates and the recent

changes to stamp duty suggest that conditions

in the sector should pick up ahead,”

commented Rain Newton-Smith, CBI

director of economics.

Over the next 12 months, financial services

firms also said they were likely to increase

investment in IT (+75%), land and buildings

(+36%) and marketing (+19%). The top reasons

for such investments included to improve

efficiency and to deliver new services.

A survey high of 73% was recorded for the

reason of reaching new customers. Meanwhile,

to tackle statutory legislation and regulation also

ranked highly.

The MPC voted unanimously

in January to maintain the

base rate at 0.5%.

This is in contrast to the 7-2 voting split that the

MPC has experienced in recent months. The

minutes noted that while Martin Weale and Ian

McCafferty believed that wage growth was

stronger than expected, concerns about

persistent low inflation meant they concluded an

increase in the base rate could further add to

this.

The lowest number of

mortgages were approved by

British banks in December

since April 2013.

Figures from the British Bankers‟ Association

(BBA) show there were 35,667 mortgages for

house purchases last month.

Last month also marked the highest annual

growth rate for unsecured borrowing, standing

at 3.8%.

Richard Woolhouse, chief economist

at the BBA, said: “The mortgage market

has been softening since the spring, but for

customers taking out home loans right now

there are some great deals and we expect the

market to begin to grow again this year.

“Robust employment data is making many of us

feel more secure in our jobs and optimistic

about our futures. That‟s now feeding through to

personal lending and credit card data,

suggesting people are happy to finally replace

the car or spend on household improvements.”