Home page The benefits of mutualization in mortgage lending In a previous article Hector McNeill recommended the return to prudent mutual organizational structures for mortgages as a step towards avoiding catastrophes in the housing finance markets in the form of organizational failures resulting from small interest rate rises and unacceptable levels of house repossessions. There are two aspects to this issue. One is the relative benefits of mutual organizations and the other is the setting of base interest rates. In this article we look at the benefits of mutualization and the setting of interest rates will be covered in another article. The Building Societies Association1 of the United Kingdom has issued a shortlist setting out the specific benefits of mutual organization as follows: They do not pay dividends to shareholders, and accordingly are able to operate on narrower margins than plc banks. This means that, overall, building societies offer lower mortgage rates and higher savings rates than their competitors. They are more likely to maintain their branch networks than banks, as they can take into account non-financial factors when assessing whether to open or close branches. Bank branch numbers have been reduced much more rapidly than building societies' in recent years. They can take into account much longer term issues when determining corporate strategy than institutions constantly under pressure to deliver rising dividends and a rising share price. They can influence, favourably, the pricing policy of their competitors. For example, pressure from building societies has prevented banks charging for access to cash machines The UK has a much stronger financial services environment through the diversity which building societies offer. They are based all over the UK, rather than in the City of London, which is the home of most financial institutions, and this gives them a different perspective. They are much closer to consumer needs and aspirations because of their ownership structure. Building society staff know that when they serve a customer they are serving one of the owners of the business. This ensures a completely different culture in building societies compared to institutions owned by shareholders. McNeill's comment on this list is that seems to be a reasonable statement of the facts. The recent fiasco is related to the point raised in this short list that in contrast to building societies which are distributed throughout the country, most financial institutions are concentrated in the City of London, and that this gives them a different perspective. One of the critical factors is their propensity to be offered and to deal more frequently with non-UK based financial products and services over which any UK authority has less ability to monitor or, in the final event, manage. In the mutual societies depositors bring money in to the society and lenders make use of it, the portfolio is altogether simpler and generally freer from risk as long as lending ratios are realistic. Iain Cornish Chairman BSA Photo:BSA Recent Association comments On 8th November, 2007 Iain Cornish, Chairman of the Building Societies Association and Chief Executive of the Yorkshire Building Society stated that: "Building society service standards are higher than that of their competitors and they lead the way by offering the most competitive mortgage and savings products over the long term." Referring to independent research undertaken on behalf of the Association, he noted: “building society savers and borrowers are significantly more satisfied with the services which they receive from building societies, than are customers of banks… the whole building society model is more transparent, simpler, more prudent and more trusted and we simply do not have the same motivation as banks to take massive risk positions in pursuit of profits for shareholders”. Two recent reports from Moneyfacts state that building societies account for over 70% of all savings products and offered the best rates over the last 18 and 36 months. Societies also account for 70% of the top 250 mortgages available today across the whole market. Iain Cornish commented on the situation of Northern Rock: “it is imperative to us that the future of Northern Rock is sorted out as soon as possible. The reputation of UK financial services, and the future progress of the mortgage market, will be heavily influenced by the outcome of current events. The credibility of the tri-partite arrangements needs to be re-built – indeed from a regulatory, economic and consumer perspective it is hard to see a more pressing priority than these two issues.” 1 Hector McNeill has no relationship nor business dealings with the Building Societies Association (BSA) and this article was produced at the initiative of Real News with no involevment of the BSA. According to the BSA website the Association represents all 59 building societies in the United Kingdom. Building societies have total assets of just under £325 billion and, with their subsidiaries, hold residential mortgages of around £250 billion, approximately 20% of the total outstanding in the UK. Societies hold just under £210 billion of retail deposits, accounting for about 20% of all such deposits in the UK. Building societies also account for over 37% of all cash ISA balances. Building societies employ over 50,000 full and part-time staff and operate through more than 2,100 branches. The BSA website is at: http://www.bsa.org.uk Posted: 17th November, 2007.