THE MORTGAGE EVENT Manchester 23 September 2005 Adrian Coles Director-General The Building Societies Association

THEMES Housing is more important than ever Housing is more important than ever Low house price inflation enhances skills requirements Low house price inflation enhances skills requirements Declining margins Declining margins Regulation of “fairness” Regulation of “fairness” Europe Europe Government schemes are relatively unimportant Government schemes are relatively unimportant

HOUSEHOLDS’ FINANCIAL ASSETS Increase since 1996 £bn% Insurance and pension policies 1, Deposits Equities Mutual funds Securities51224 Cash34179 Other Total financial assets 3,

HOUSEHOLDS’ BORROWING Increase since 1996 £bn% Short term loans Long term loans secured on dwellings Other Total Liabilities 1,

TOTAL HOUSEHOLD WEALTH Household Assets 2004 £bn% Housing3,22146 Insurance and pension policies 1,66824 Deposits82512 Other non-financial 6089 Equities3595 Mutual funds 1432 Other financial 1001 Securities511 Cash34- Total7,008100

HOUSEHOLDS’ TOTAL ASSETS 1996 % Total assets: £3.6 trillion

HOUSEHOLDS’ TOTAL ASSETS 2004 % Total assets: £7.0 trillion

HOUSEHOLD WEALTH: THE OVERALL POSITION £ trillion

LOW HOUSE PRICE INFLATION No boom, no crash. Highly unusual. No boom, no crash. Highly unusual. Premium on skills – Premium on skills – Underwriting Underwriting Valuation Valuation Borrowers’ risk assessment Borrowers’ risk assessment Real debt repayment. Today’s generation of borrowers will be the first to repay their mortgage loans. Real debt repayment. Today’s generation of borrowers will be the first to repay their mortgage loans.

DECLINING MARGINS IN BUILDING SOCIETIES Income, Expenditure and Surplus Per cent of mean assets Net Interest Income Other Income Provisions and losses Management expenses Corporation Tax Retained Surplus (0.00)(1.06)(0.21) (0.08)(1.04)(0.15) (0.09)(1.04)(0.14) (0.05)(1.02)(0.14)0.36

NARROWING MARGINS: OPTIONS Travel along the risk curve to expand the margin Travel along the risk curve to expand the margin Sub prime Sub prime Self-cert Self-cert Buy-to-let, etc Buy-to-let, etc Expand other income Expand other income Diversify into new areas Diversify into new areas Diversify within financial services Diversify within financial services

NARROWING MARGINS: OPTIONS Cont’d Concentrate on what you’re good at Concentrate on what you’re good at Origination Origination Administration Administration Funding Funding Cut, or spread, costs Cut, or spread, costs Accept reduced profits Accept reduced profits

“FAIRNESS” Treating customers fairly Treating customers fairly Product design Product design Promotion Promotion Targeting Targeting Staff remuneration Staff remuneration After sales service After sales service Complaints Complaints Unfair Terms in Consumer Contracts Regulations Unfair Terms in Consumer Contracts Regulations Unfair Commercial Practices Directive Unfair Commercial Practices Directive

“FAIRNESS” Cont’d FOS: “Fair and reasonable in all the circumstances” FOS: “Fair and reasonable in all the circumstances” Consumer Credit Bill: “Unfair relationship” test in relation to second mortgages, unsecured lending Consumer Credit Bill: “Unfair relationship” test in relation to second mortgages, unsecured lending Which? proposed Code on “Fair and responsible practices” Which? proposed Code on “Fair and responsible practices” Banking Code: “We promise that we will act fairly and reasonably in all our dealings with you.” Banking Code: “We promise that we will act fairly and reasonably in all our dealings with you.”

EUROPE EU expectation of growth in cross border lending – “integration” EU expectation of growth in cross border lending – “integration” Wide differences in – Wide differences in – Types of mortgage Types of mortgage Consumer protection regimes Consumer protection regimes Early repayment fees, interest rate caps, interest rate variations Early repayment fees, interest rate caps, interest rate variations Valuation practices Valuation practices Access to credit databases Access to credit databases Land registry practice Land registry practice Debt recovery Debt recovery Green paper out now Green paper out now UK market already the most complete and largest – so little to gain UK market already the most complete and largest – so little to gain

GOVERNMENT INITIATIVES Equity sharing Equity sharing Key worker initiative Key worker initiative Real Estate Investment Trusts Real Estate Investment Trusts

THE MORTGAGE EVENT Manchester 23 September 2005 Adrian Coles Director-General The Building Societies Association