MAY 2014

1. MAY 2014 Help to Buy has helped more than 27,000 people buy a new home Lenders cannot afford to treat all of their customers the same when it comes to interest rate rises, HML’s John Grimbaldeston tells Credit Today The British Chambers of Commerce has revised upwards UK growth for 2014 to a seven-year high

2. HML News And with £37 billion assets under management for dozens of clients, including building societies and major banks, we don’t just have a view of one mortgage portfolio, but several. Our advanced analytics allow us to model how customers have been impacted by rate changes over the years, from negative equity and repossessions to arrears and interest-only mortgages. Completing an income and expenditure review with a customer is another essential step if a lender is to identify how much disposable income they have in comparison to their mortgage repayment. Combined with credit bureau and behavioural data and captured Potential Impairment Indicators, this information ensures we can build a complete picture of a mortgage customer, their affordability position and their account history, indicating how we believe they will cope with mortgage payment shocks. However, while I could continue with how lenders can build a tailored customer contact strategy - which should include timely debt advice where needed - it is also important to remember that many customers need to step up to the plate and take responsibility for payments. Mortgage rates have been low for a historically long time, and not every customer is in a vulnerable position. Those who have been making overpayments will now be in a much stronger position, and for those who have not, it is essential they remember that paying their mortgage is a priority, not a luxury. When it comes to interest-rate susceptibility, we are all in this together – but lenders need to ensure they give their most vulnerable customers extra support both now, and following base rate rises. John Grimbaldeston, director of products and marketing, speaks to Credit Today. It appears that everywhere you look at the moment, there is an economist or other market commentator discussing when the interest rate will rise and what this will mean for customers. The general consensus seems to be that there are many mortgage customers who have either never experienced a rate rise since owning a property or forgotten what one feels like, and the increased repayments could come as a shock to the lifestyle they are accustomed to. There is also talk of mortgage prisoners i.e. homeowners who are unable to switch to a better deal and will therefore have to remain with their current loan. Of course, while it is good practice to inform all mortgage customers about an increase in monthly repayments, HML firmly believes that it is even better practice to focus now on those who are the most vulnerable customers. Vulnerable customers need to be at the front of the queue Lenders need to start engaging with their most vulnerable customers and assess how these individuals would be able to meet any additional monthly repayments. The Financial Conduct Authority explicitly told lenders in its Thematic Review published in February that they need to engage with their customers over their susceptibility to interest rate increases. There are many ways lenders can do this; HML’s preferred method is to segment our clients’ portfolios into different customer groups, allowing us to take a view of those who require lender support first.

3. HML News HML is celebrating ten years of operating in Derry. HML has been servicing Irish lenders’ portfolios since 2005, with the Derry office an important strategic move for HML’s expansion in Ireland. Currently based out of Ulster Science & Technology Park, the Derry office has grown from a staff of around 25 in 2004 to some 330. The Derry office has been central to HML expanding in the Republic of Ireland, with the company making significant contract wins in the country.HML has over 25 years of experience in the mortgage administration sector, and chose to open an office in Derry in order to draw upon the financial expertise in the city at a time when many financial companies chose to outsource abroad. There are 62 members of staff who have been with HML in Derry since 2004.HML’s Derry site has acted as a call centre for Children in Need since 2008,raising thousands of pounds for local charities including Foyle Hospice and has supported local schools, such as during the Time to Read initiative.Andrew Jones, chief executive officer at HML, said: “I am delighted that HML’s Derry site is celebrating ten years, and we have certainly substantially grown during that time. Opening a site in Derry was an important strategic move for us, drawing upon the experienced resources in the area and helping us to take advantage of growing opportunities in the Republic of Ireland. . “I’d like to thank all of our Derry staff for their hard work, particularly those individuals who have remained at HML since we launched in Northern Ireland in 2004.” Mel Smith, director of strategy and planning for the chief operating office and who is based in Derry, commented: “It’s certainly an exciting time for HML. We celebrated 25 years last year, as well as launching a new operational base in Dublin, enjoying double-digit profit growth and took home numerous industry awards. “Celebrating ten years in Derry is testament to our experience and longevity, which have also contributed to our leading ratings. Our UK residential primary (sub-prime) rating by Fitch is the highest in Europe and our prime rating is the equal highest rating of any servicer in the world.“I’d like to thank all HML staff in Derry for their hard work over the years, and look forward to seeing how we grow and develop in the future.”

4. HML News David Kelly has spoken exclusively to the Irish Independent about debt advice for customers in mortgage arrears. You can read the article below: Why some banks are paying for independent debt management support for their customers in mortgage arrears HML manages mortgages and other loans for a range of banks in Ireland and the UK with a total value of approximately €50 billion.  This gives us a useful perspective into how the banks in the two countries compare in terms of dealing with mortgage arrears and whether there are any lessons for banks in Ireland from their UK counterparts.The first thing to say is that it is clear now that the Irish banks have moved into a new phase in dealing with the mortgage crisis.  After what all sides will agree was a very slow start – linked no doubt to both the scale and the sensitivity of what was an unprecedented crisis for this country - the banks are now addressing the mortgage arrears problem with real vigour and on a scale that was hard to imagine even 18 months ago.  However, while the banks are able to engage with the majority of their customers, it is also clear that for some customers, their relationship with their bank has been destroyed almost beyond repair. Confidence and trust in the bank has collapsed and contact has been broken off.  For customers in this situation, this means that it is much more difficult for them to get proper advice on how to deal with their problem and, for the banks, it means that it is almost impossible to try to find a workable way forward.    Ironically, many customers might get an initial sense of relief or even euphoria when they decide not to engage with their lender.  But it’s a very false and misleading feeling.  Breaking off communications may delay otherwise difficult decisions but it makes very unwelcome outcomes much more likely.  The likelihood of repossession, for example, increases significantly where there is no engagement.  On the other hand, we find that where engagement is restored, outcomes can improve significantly.  And the earlier customers who are in financial difficulty can get can advice that they trust, then the better the outcome for both the customer concerned and for the lender.  The key here is trust.  In the midst of a mortgage crisis, unfortunately, some customers simply won’t be able to bring themselves to trust the advice they are getting from the bank – regardless of how fair or balanced that advice is.  They may have lost confidence in the bank or they may be afraid to share the details of their financial position with the institution in question.In the UK, banks are responding to this by putting in place access routes for their customers to independent debt management agencies.Many people are surprised that banks might be willing to encourage – even to pay for – independent advice on debt management issues for customers who are, effectively, refusing to talk to them. But in our experience they are.  The reason is simple. In one sample of customers we manage on behalf of a UK bank, for example, over85% of customers who received independent advice on managing their debts paid more back to the bank than they were doing previously. Continued on the next page

5. HML News In that sample, the bank saw an increase in “cash collected” of some 50% as a result of helping the customer get independent, trusted advice.However the exercise works for the customer as well as the lender.  Customers in our sample talked of feeling a sense of control returning over their financial affairs.  They talk of regaining self-respect and being able to sleep again at night.In the UK we now work closely with an independent debt solutions agency to whom we can immediately refer customers whom we believe would benefit from their assistance.  The banks involved encourage us to do so – to the point of empowering our customer agents to initiate the referral - because they know that the outcome will likely be better both for them and for their customer.Once the referral is made, the customer then deals directly with an appointed case-manager at the relevant debt management agency who will help them to develop a Debt Management Plan (up to and including an Individual Voluntary Arrangement / IVA) and manage it out over time.However the key is making that referral as easy and speedy as possible.Our agents can make the referral from the phone call on which they are engaged with the customer; seamlessly putting the customer in touch with an agent who can begin work immediately.Irish banks have made tremendous strides in recent months and some banks are now experimenting with referring certain customers to independent advisors. However, it is occurring now only on a relatively small scale. Perhaps the next challenge is how to put in place the type of broader infrastructure that could cope with the likely demand that exists for this type of service. The outcomes we’ve seen for both sides of the mortgage arrears crisis suggest this could make the effort very worthwhile.You can also read the article on the Irish Independent online.

6. Industry Statistics Consumer Prices Index BoE Base Rate Unemployment Rate (ONS) Halifax House Price Index Gross Mortgage Lending (CML) Home Repossessions (CML) APRIL ‘14 1.8% MAY ‘14 0.5% JAN-MARCH ‘14 6.8% APRIL ‘14 Down 0.2% on MAR Average price £177,648 APRIL ‘14 Up 8% on MAR £16.6 billion JAN-MARCH ‘14 6,400 MARCH ‘14 1.6% APRIL ‘14 0.5% DEC-FEB ’13/’14 6.9% MARCH ‘14 Down 1.1% on FEB Average price £178,249 MARCH ‘14 Up 4% on FEB £15.4 billion OCT-DEC‘13 6,100 FEB ‘14 1.7% MARCH ‘14 0.5% NOV-JAN ’13/’14 7.2% FEB ‘14 Up 2.4% on JAN Average price £179,872 FEB ‘14 Down 6% on JAN** £15.2 billion JULY-SEP ‘13 7,200 *Date reflects what the statistic was during that period, rather than when the statistic was published ** January figure has since been revised upwards to £16.1 billion

7. Industry Statistics Consumer Prices Index The CPI increased by 0.2% on March to 1.8%. The largest contribution to the CPI’s rise came from transport costs, particularly motor fuels and air fares. The timing of Easter was noted as having a likely impact on the index. The increase was partially offset by a fall in food costs. BoE Base Rate The Bank of England kept the base rate at 0.5%, as well as the stock of asset purchases at £375 billion. Halifax House Price Index The average price of a home declined by 0.2% between March and April to reach £177,648. This represents an annual increase of 8.5% from April 2013. Stephen Noakes, mortgages director at Halifax, said: “Prices fell marginally during the month representing a second successive monthly decline. "Although mortgage approvals have now declined for two consecutive months and property transactions fell in March, on an annual basis housing demand still remains strong. Housing demand continues to be supported by an economic recovery that is gathering pace, rising consumer confidence, low interest rates and wage growth finally beginning to outgrow consumer prices. However, with supply of properties being slow to respond to market conditions, stronger demand in the past year has resulted in upward pressure on house prices." Unemployment Rate The unemployment rate for January to March stood at 6.8%, representing 2.21 million people. Compared to the previous three months, the number of individuals in employment rose by 283,000. In addition, the number of unemployed people declined by 133,000. Gross mortgage lending Gross mortgage lending stood at £16.6 billion in April, an increase of 8% on March and 36% on the same month in 2013, when lending reached £12.2 billion. It represents the highest total for an April since 2008, when it reached £25.7 billion. CML chief economist Bob Pannell said: “The implementation of the Mortgage Market Review (MMR) from late April has made it a little harder to interpret recent data. As we have pointed out previously, there may be some disruption to the monthly pattern of activity while MMR procedures bed down. “The Bank of England has signalled that macro-prudential measures to limit the housing market upturn are likely in the near future, and possibly in the very near future.” Home Repossessions Repossessions rose from 6,100 to 6,400 from Q4 2013 to Q1 2014, the CML has revealed. However, this represents a 20% decline on the same quarter in 2013. Around 1.7% of homeowners had arrears of at least three months’ mortgage payments or more.

8. Top News Stories • Two-thirds of mortgage borrowers are vulnerable to a rise in interest rates. • This is according to a new report by the Daily Telegraph’s Your Money, which analysed official lending data. • The borrowers that are vulnerable have variable or floating rates, which are likely to increase should the base rate will pushed up by the Bank of England. • The analysis reveals that in the last seven years, the proportion of variable rate mortgages has risen from 52% to 67%. • Nigel Turner, chief commercial officer at HML, said: “As a sector, we need to keep an eye on the potential impact of base rate increases over the next 12-18 months. We already have plans in place to segment the portfolios we manage and proactively engage with customers over their susceptibility to interest rate increases - something which the Financial Conduct Authority explicitly told lenders to talk to customers about in its • Thematic Review published in February.” • The recession is officially over, according to the National Institute of Economic and Social Research (NIESR). • The UK’s GDP will exceed its previous 2008 peak over the next few months, with growth of 2.9% forecast for this year. However, per capita GDP will not exceed its previous peak until 2017. • According to the independent research institute, it sees “few signs of domestic inflationary pressures”, although it did note uncertainty around monetary policy. • In particular, it pointed to “the path of interest rate rises, where market expectations remain for a rate rise in early 2015; the new equilibrium level, which the Bank has said is likely to be materially below 5%; and the exit strategy for quantitative easing, in particular whether this is used as an active policy tool”. • Nationwide has urged the Bank of England to avoid taking immediate steps to ‘correct’ the housing market. • The building society said there may be “unintended consequences” for the rest of the UK if the central bank attempts to rein in London’s housing market. • Commenting on Help to Buy, Nationwide’s finance director Mark Rennison told the Daily Telegraph that the scheme “accounts for only 3-4% of housing transactions, in London it’s 2% or less”. As such, it was “implausible” to link climbing house prices to Help to Buy. • He added that the housing market in parts of the UK, such as the north-east, could suffer if the Bank was to clamp down on London’s sector. • Of all mortgages secured under Help to Buy’s first phase, Nationwide accounted for almost a third of the total. • . • .

9. Top News Stories • UK growth will reach a seven-year high in 2014, according to the British Chambers of Commerce (BCC). • The BCC has upgraded its GDP growth forecast to 3.1% from 2.8% in 2014, which would represent the highest growth rate since 2007. • Its 2016 forecast remains at 2.5%, although it has revised upwards its 2015 forecast from 2.5% to 2.7%. • It noted that the base rate is expected to rise to 0.75% in Q1 2015, which is two quarters earlier than was previously thought. • BCC director-general John Longworth said: “The task at hand is to ensure that 2014 is not ‘as good as it gets’ for the UK economy. Everything possible must be done to avoid slower growth in future. • “We need to invest, innovate, export and build. While we forecast business investment to grow strongly over the next three years, that investment is rising from an extremely low base. • “To sustain investment momentum into the future, the government and the Bank of England need to give businesses the confidence they need to invest.” • He urged the Bank to keep the base rate low for as long as possible and to ensure future rate rises are in small and gradual increments. • Help to Buy has enabled more than 27,000 people to buy a new home. • The Treasury has revealed that around three-quarters of properties bought through the scheme are new-builds, with private house building up by a third since Help to Buy was launched. • The mortgage guarantee part of the scheme has proven to be the most popular in the north-west, while the equity loan new-build part has experienced its highest take-up in the south-east. • Completions under the mortgage guarantee scheme in London represent 0.6% of all mortgage lending. The average across the rest of the UK is 1.3%. • The government also highlighted the focus on responsible lending. Under the mortgage guarantee scheme, the average house price stands at £151,597, with the typical value to income multiple just over three times the salary. • Stewart Baseley, the Home Builders Federation’s executive chairman, said:“After a number of years when house building levels fell to a record low level, all indicators show supply is now increasing rapidly. • The Help to Buy Equity Loan scheme is supporting demand for new-build homes - and if buyers can buy, builders can build. Its extension provides certainty about longer-term demand that will allow the industry to plan ahead, rebuild capacity lost in the downturn and ultimately deliver sustainable increases in supply.”