UK: A Clearer Picture Emerges - Squaring Up To New Challenges

Last Updated: 21 June 2007
Article by Deloitte Financial Services Group

Most Read Contributor in UK, August 2017

Value creation in the mortgage industry

The mortgage industry is currently beset with a number of structural challenges and conflicting expectations placed on its participants. Traditional product volume based strategies may no longer yield adequate shareholder returns whilst limited new product and service innovation is resulting in a lack of differentiation amongst the leading players.

In response, competitors are repositioning across the value chain with new entrants threatening to bring disruptive influences to the traditional market. Whilst group companies are beginning to reconsider the role of the mortgage business within their broader retail and lending portfolios.

Increasingly, customers, analysts, intermediaries and the media are placing heightened and often conflicting expectations of success on mortgage participants.

The current irrational competitive behaviour is not sustainable, with the market increasingly demanding a focus on long-term value creation and strategic transformation.

The value creation challenge

The challenge for existing mortgage players is how to create and delivery strategies that deliver sustainable value.

Current product volume based strategies are becoming obsolete. They stem from the belief that customers can be acquired cost effectively using discounted headline rates and that these same customers will start making profitable contributions once they revert to products at the standard variable rate. With declining customer loyalty and increasing switching behaviour, cross subsidisation of loss making products with high margin ‘back books’ is no longer a realistic strategy. Mortgage origination businesses are currently struggling to maintain profitability whilst seeking to retain lending volumes at historic levels in order to meet market expectations. Industry commentators continue to focus on market share as the primary measure of success. This creates unrealistic expectations, often forcing organisations to focus on volume at the expense of value.

A value based approach to long term value creation

In order to break out of the current challenges, mortgage players must focus on all of the value drivers available to them and address them with a long term goal of value creation in mind. Traditional ‘jaws’ based approaches will deliver short to medium term value, but tend to focus on impacting the cash flows of the business which contribute to but do not create sustainable value creation.

Consideration of some additional value drivers such as the external environment and efficiency of assets will provide longerterm value creation opportunities by focusing on balance sheet utilisation and managing stakeholder expectations on business performance.

Disruptive new business models

The industry is witnessing a growing emergence of new entrants and new business models which could potentially disrupt the existing market. These strategies are designed around the use of funding and credit risk management as a means to generate profitability and deliver enhanced value creation. Investment banks and hedge funds are using their capabilities to create ‘off balance sheet’ funding mechanisms. They have become increasingly active in the UK mortgage sector by acquiring smaller scale players and/or purchasing entire mortgage portfolios. In addition, there is a growing trend toward start-ups targeting the market with propositions aimed at providing outsourced funding and treasury management services.

These business models all share a common approach. They are targeting an opportunity to profit from the margin spread associated with providing lenders with lower cost capital, whilst offering to manage credit risk at arms length through a variety of risk transfer and derivative instruments.

Asset efficient business models represent both a threat and an opportunity for existing mortgage lenders. They have the potential to change the dynamics of the industry and shift profitability away from product pricing and operational efficiency whilst positioning funding as a key source of longer-term value creation. This development may result in lenders establishing highly efficient origination businesses with little or no processing and servicing capability, and that are focusing purely on gathering assets for debt management in order to generate volume at scale.

Others may consider joining up with other parts of their own organisations or developing partnerships with external providers to reap the benefits arising from ‘off balance sheet’ funding and credit risk trading activities. Smaller lenders may consider the benefits of merging with larger entities that offer complementary capabilities or combined scale.

The result is likely to see a polarisation of participants: businesses which focus either on product origination or funding as their main source of competitive advantage and value generation.

Delivering value creation through strategic transformation

Responding to these challenges will require market participants to consider strategic transformation, which could consist of a number of steps delivering increased sustainability of benefits as implementation time and complexity increases.

These incremental steps may include:

  1. Stabilising current business performance through optimising channel volumes, aggressively addressing customer retention issues, changing the product margin mix by entering new segments or enhancing the service offering.
  2. Creating a lower cost operating model by introducing enhanced automation of credit decisions and straight-through processing, actively targeting and reducing reactive arrears and recovering costs by investing in new capability, and reconsidering the position in the value chain to outsource or offshore non-core functions.
  3. Developing an asset efficient business model by focusing on balance sheet rather than purely profit and loss led strategy, developing an asset and credit risk efficient treasure model, and managing liquidity, capital and risk appetite as enablers of value creation.

Effective competition within an evolving market will required clear strategic choices about where to participate and how to build distinctive capability through transformation to create sustainable value for the organisation, its customers and its shareholders or members.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.