What's in the pipeline? CML publishes new data on loan applications
Published: 18 March 2014 | Author: Bernard Clarke
Today, for the first time, we are able to publish data about what is happening in the mortgage application process. For almost a decade, our regulated mortgage survey (RMS) has been a comprehensive source of data, for lenders and for market commentators, on what happens at the end of the lending process – at the point of loan completion. But that long-established data source tells us nothing about the behaviour of borrowers, lenders and brokers at earlier stages in the home-buying or re-financing process.
In this article, we are previewing some of the initial findings from our new regulated mortgage survey (RMS) applications database. This new source of data provides important insights into the behaviour of consumers and firms. It enables comparisons between mortgage applications, and sheds light on questions like how long it takes mortgage applications to work through the pipeline, and what happens during that process.
Some caution is needed in interpreting this new dataset. In particular, mortgage pipeline times may be affected by a range of factors, including the complexity of the transaction, the circumstances of the borrower, the need to fulfil regulatory and fraud prevention requirements, and differences in underwriting processes. But, in allowing for all this, we can see that in the year to June 2013:
- Applications for loans by first-time buyers typically took 81 days to reach completion, while the process of remortgaging took an average of 59 days. The database tells us about the differences in time taken to process a range of different types of loans – including house purchases by both first-time buyers and movers.
- Loans with different risk characteristics show different application-to-completion timelines – as might be expected, there is a longer pipeline for loans with higher loan-to-value (LTV) ratios, for example.
- The completion time for a mortgage for a Right to Buy purchase is longer on average than most other applications, although this partly reflects differences in the process. In Scotland, meanwhile, the process is shorter, essentially because of differences in the home-buying process.
For lenders, the database provides enormous potential to benchmark their own performance and processes, and therefore to inform business strategy and decision-making. Firms can compare their own pipeline speeds, for different types of mortgage business. And the data provides insights into the performance of broker firms, including how much business they do, how quickly they do it, and the different types of mortgage applications they are dealing with.
Filling the gap
Since April 2005, the RMS has been a comprehensive source of data, allowing a fantastic depth of analysis of data that becomes available around six weeks after mortgage completion.
But to plug a gap in information about what happens to mortgages earlier in the process, we have been working with members to create a new applications database. In essence, this brings the entire range of RMS data forward in time to when customers submit their applications. The new database covers around 70% of regulated lending, and its results are available through our Mortgage Clarity service to members who provide data.
A new resource for sales planning
The applications database is an extremely powerful source of information and a multi-purpose planning tool. It allows lenders to dissect business volumes and characteristics from individual broker firms and direct channels, and by loan types, affordability metrics, geographical regions and in many other ways. In short, the new database provides lenders with a forward-looking view of their pipeline business that can be tailored to give all sorts of insights.
For example – and just to take one snapshot – Chart One shows how business volumes for three of the larger broker firms in the first-time buyer fixed-rate mortgage market varied over time. Overall, the market share of these three firms varied between around 6% and 10%, largely due to fluctuations in the share of one firm.
Chart One: Broker market share in the first-time buyer fixed-rate mortgage market
We have anonymised the data (and restricted it to three firms for easier reading) as the chart is purely to illustrate the type of analysis that is possible. Participating lenders can tailor the data to identify those broker firms that are active – currently and historically – in those market segments in which they are currently focused, and to draw on it to shape their commercial strategy.
While this data offers members valuable sales insight and helps them plan commercial strategy, it also provides insights into the wider market.
How long is the pipeline?
How long a mortgage takes to complete depends on many factors, not least the complexity of the transaction. We provide details of the source of data on house purchase at different stages in the timeline here. But little data exists on what’s happening in the mortgage pipeline and the movement of loans between different stages within this process.
We might expect that because remortgaging is, in the main, a relatively simple transaction, it should be much quicker to complete. In contrast, house purchases, and particularly those by first-time buyers, are more complex and might therefore be expected to take longer to process. And, in fact, these assumptions are broadly correct. In the 12 months to June 2013, regulated mortgage applications took an average of 72 days to complete. But, as Chart Two shows, applications for remortgaging were significantly faster – 59 days on average. First-time buyer loans, meanwhile, spent 81 days in the pipeline before completion.
Right to Buy transactions took an average of 121 days to complete, an intuitive result given that these loans go through a transaction process partly shaped by different local authorities. Typically, they also require more paperwork and are more complex to underwrite.
Chart Two: Regulated mortgage applications, number of days from application to completion
Within the sample, there is also variation between lenders. The average time taken to complete an application by a first-time buyer, for example, ranged between 72 and 87 days. Benchmarking analysis can offer valuable insight and help drive greater efficiency within firms. But, of course, simple averages can mask the underlying position. And the detail provided by this new data allows us to get much further “under the hood” of mortgage processing in a way that has simply not been possible in the past.
Chart Three: Average processing times for first-time buyers, by loan characteristics
Chart Three provides a breakdown of lending to first-time buyers, showing that loans associated with higher risks – for example high LTV or those extending beyond retirement age – take longer to complete.
An interesting result is that in Scotland the mortgage application-to-completion pipeline is shorter. A successful application by a Scottish first-time buyer takes an average of 59 days to complete, compared to 81 in the UK as a whole. We infer that this reflects differences in the home-buying process in Scotland, with the contract becoming legally binding at a relatively early stage in the process.
The data also lets us compare how loans originated through different channels in the UK progress through the pipeline. The data shows that 5% of loan applications submitted directly to lenders are completed very quickly – in fewer than 30 days. Among broker firms, the proportion of business completed to the same timescale varies significantly. Some firms have a significantly higher completion rate – although this may, of course, reflect differences in the customer base.
Over a more typical completion timescale of 90 days, differences between broker firms become less pronounced, and tend to be closer to the average of 63% of mortgages that are processed directly by the lender within that period. But even over this timescale, some broker firms had a materially higher completion rate.
For lenders interested in drilling down into the quality of business, our database offers the potential for some really forensic examination of the profile of lending from different brokers or direct channels.
Our new database is still in its infancy. As it builds up in the coming months, new insights will emerge. The database is primarily a resource for lenders that contribute their own data, and clearly has potential to support benchmarking and business planning activities. It will also support our work more generally, and may inform future publicly available analytical work.
We are also entering a world of greatly expanded regulatory reporting to the FCA. And because the RMS is based on copies of lenders’ regulatory product sales data, we will be able to get more insights from our applications and completions data. We will be able to look in much greater detail at new lending, including the effect of the new affordability rules on different streams of business, and whether new trends emerge in procuration and arrangement fees. We look forward to playing a key role in helping the industry navigate through these uncharted waters with our new, and ever developing, data.
Members can find more details about the database, including data definitions, on the applications database page of our website. Lenders wanting more information, or to find out how to participate in this new CML member resource, should contact firstname.lastname@example.org.