The Mortgage Event Weston-Super-Mare 5 October 2005 Tracy Morshead Managing Director Principality

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

HOUSEHOLDS’ FINANCIAL ASSETS Increase since 1996 £bn% Insurance and pension policies1, Deposits Equities Mutual funds Securities51224 Cash34179 Other Total financial assets3,

HOUSEHOLDS’ BORROWING Increase since 1996 £bn% Short term loans Long term loans secured on dwellings Other Total Liabilities1,

TOTAL HOUSEHOLD WEALTH Household Assets2004 £bn% Housing3,22146 Insurance and pension policies1,66824 Deposits82512 Other non-financial6089 Equities3595 Mutual funds1432 Other financial1001 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. Premium on skills – –Underwriting –Valuation –Borrowers’ risk assessment 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 TaxRetained 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 –Sub prime –Self-cert –Buy-to-let, etc Expand other income –Diversify into new areas –Diversify within financial services

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

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

“FAIRNESS” Cont’d FOS: “Fair and reasonable in all the circumstances” Consumer Credit Bill: “Unfair relationship” test in relation to second mortgages, unsecured lending 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.”

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

GOVERNMENT INITIATIVES Equity sharing Key worker initiative Real Estate Investment Trusts

VISION OF THE FUTURE Mortgage margins do not recover. Retail Savers keep paying for Mortgage Pricing. Income regained by lenders through fees and charges. Equity release growing but not as quickly as forecast. Big uptake of property into Sipp’s. HIP’s delayed launch. Housing transactions spike before launch. Depressed after. HIP’s fail to make home buying process any easier than it would have become anyway. HIP’s do however change shape of value chain. Borrowers continue to chase price. Internet shopping of mortgages becomes internet purchase. Price becomes valuation. Brokers put under pressure……………………. …………………….but don’t worry you’ll still account for over half the market.