Mortgage market consolidations are coming – but will consumers benefit?
In the last 6 months we have witnessed massive consolidations as two UK shareholder-owned banks were acquired by building societies, becoming mutual banks. These mutually owned banks and building societies together hold assets of £648.3bn. They account for 29% of total UK mortgage balances and a 23% share of UK savings balances.
While possibly not as big as these two transactions, more consolidations are coming – the signs are all there:
- The UK mortgage market is being pressured by regulatory forces, margin compression, and fierce competition.
- Stricter capital requirements are compelling lenders to optimise their balance sheets by merging portfolios and reducing capital-intensive risk-weighted assets.
These trading conditions are creating opportunities for mutually beneficial deals, where smaller banks and non-bank lenders can sell portfolios to larger institutions to free up liquidity. Meanwhile, a group of specialised buyers, including private equity firms and challenger banks, is keen on acquiring these portfolios to expand their market share. This consolidation enhances risk management, achieves economies of scale, and improves servicing capabilities. While maybe a technical capital management instrument, Significant Risk Transfer (SRT), and alternative capital utilisation dominated conversations at a recent international banking conference. SRT is driving further consolidation.
Not surprising that there are those who argue that Consumer Duty requirements on ‘closed books’ are not working
There is a theory that when consolidations happen consumers benefit through increased efficiency, which can lower the operational costs of originating loans and potentially lead to faster processing times and more competitive pricing. Additionally, consolidations can lead to an expanded range of products and services coupled with improved access to branches and/or digital platforms, which enhance customer outcomes.
Tell that to the mortgage prisoners, numbered at around 40,000 borrowers, who despite being up to date with payments cannot switch when it might benefit them to do so, because they have loan and/or borrower characteristics that are outside current lender appetites. Consolidations risk making the plight of these borrowers worse. Only this month it has become known that a major mutual bank is to transfer a historic mortgage portfolio to an inactive lender with no new business operations, raising further concerns for mortgage prisoners in dormant portfolios. The situation is worsened when the portfolio is analysed, many of these borrowers took out their loans before the 2008 global financial crash and have been locked into high cost inflexible mortgage products since then. So while consolidations and SRT trades may result in positive gains for many borrowers, there continue to be negative outcomes for a small but vulnerable cohort with special needs. Despite government attention to the issue nothing has materially changed to help these borrowers. The inaction being excused by the claim that any prescriptive new requirements would be unacceptable and unfair intervention into the mortgage market.
Not surprising that there are those who argue that Consumer Duty requirements on ‘closed books’ are not working and that it is time for the UK financial sector to rethink how it treats vulnerable customers. Who, with an independent mind, wouldn’t have sympathy for a borrower who had maintained payments on an excessive rate for 15 years, but was stuck in a closed portfolio owned by an inactive lender simply because the product type they bought is no longer available.
