'Your' lender may not be all you thought

Building societies are farming accounts out to strangers

Madame Bovary received her final comeuppance in the recent BBC drama when her spiralling debts were sold on to a third party who demanded immediate repayment in full.

Selling on debts may seem a bizarre and, in Flaubert's novel, cruel practice, but growing numbers of UK mortgage lenders are doing pretty much the same with our home loans.

The process is called securitisation and although it is unlikely to harm homeowners, it symbolises how far mortgage business has been removed from the hands of friendly local building societies and into the world of international finance.

This trend is further symbolised by the changing nature of call centres. When we ring our chosen lender not only are we likely to be directed to a centre in Scotland or the North-east, but the voice on the phone may not even belong to an employee of the company we were planning to borrow from.

Outsourcing is increasingly popular and involves call centres handling inquiries for a range of different lenders' products, as lenders attempt to cut costs by pooling technology and resources.

But who stands to benefit from this further move away from personal service in the mortgage market - homeowners or the lenders?

Put simply, mortgage securitisation involves bundling up a package of mortgage loans and selling them to corporate investors, usually banks, building societies or pension funds in the UK or Europe.

In return the corporate investors receive a steady stream of revenue over the lifetime of those mortgages.

Lenders can raise millions of pounds this way. Paragon set the securitisation ball rolling in 1987 and has since raised £7bn.

The process is becoming more popular. Northern Rock plans to securitise £1.5bn of mortgage business this year. Abbey National has raised a total of £1.25bn, 2 per cent of its total mortgage book.

The advantage for home buyers is that securitisation allows lenders to drive down their costs - a saving that should be passed on to the consumer. It may also mean that more and more choice of mortgage is made available as securitisation enables small, niche players in, which grant loans to customers in the sub-prime market.

But the process sounds ominous. Lenders will not ask for your permission before selling off your loan, most of us grant this unknowingly when we sign up to the small print in our mortgage contract.

"Customers will not know whether their mortgage is in the securitisation pool or not. You could ask why do they need to know?" says Tony Armstrong, director of corporate relations at Northern Rock.

Your home loan may be washing around the European money markets, but lenders insist it is no concern of yours. "My mortgage may be securitised - I don't know," says Armstrong.

Lenders guarantee that mortgages which have formed part of a securitisation package are treated in exactly the same way as other home loans, even those customers who have trouble keeping up their payments. In contrast to Madame Bovary, if you default, it will be the original mortgage lender knocking on your door.

Lenders benefit from securitisation by getting their hands on your money at the beginning of your mortgage term. It also allows them to generate extra mortgage business through more efficient capital management.

"Securitisation allows lenders to offer cheaper deals because they can live with smaller profit margins. They can also offer a greater number and variety of deals, which can improve choice," says Ray Boulger, technical manager with the mortgage specialists John Charcol.

Outsourcing is an increasingly popular method of driving costs down and offering attractive deals in the competitive UK mortgage market. Boulger says homeowners may see a difference.

"Outsourcing will have a direct impact on borrowers. The call-centre operator dealing with your mortgage and the literature you receive will ultimately come from a different source to your lender. The downside is that if there is a problem with administering your mortgage it can be hard to know who to kick."

Both small and large mortgage lenders outsource part or all of their operation. HML, a subsidiary of Skipton Building Society, administers mortgage business for 32 different lenders.

Customers are not supposed to spot the difference. The operator should answer with the correct lender's name, according to the number you have dialled. But they will be employed by HML rather than the lender you thought you were phoning. Some staff may deal with more than one lender's mortgages.

Business development director Martin Reay says HML administers different stages of the mortgage process depending on the lender's requirements. "We have various call centres dealing with anything from the first inquiry to post-completion, and even arrears collection."

Outsourcing has long been popular in the United States and Woolwich has now teamed up with the American mortgage giant Countrywide Credit Industries to offer its own outsourcing service.

The two are setting up a company called Global Home Loans, based in new premises in Dartford, south-east London, to handle mortgage business for the Woolwich. Most staff will have no experience of working for the lender whose business they are processing.

"Some staff will transfer from the Woolwich but the rest will be recruited to the new company," says a spokesman, Rob McIvor.

The main aim will be to slash costs by accessing Countrywide's highly advanced technology and processing systems. The plan is to offer these to rival mortgage lenders to allow them to cut their costs. Staff will be recruited to Global Home Loans and work in teams dedicated to different lenders.

In March Bradford & Bingley teamed up with ALLTEL Information Services from Little Rock, Arkansas, to offer mortgage processing and systems support to UK and, ultimately, European lenders.

Nigel Terrington, group chief executive of Paragon, says pooling mortgage lenders' resources is long overdue. "There are some 134 mortgage lenders in the UK. That is too many and most are not cost-effective. Pooling resources in this way will make the industry more efficient and lenders could pass on savings to their customers in the form of lower interest rates."

Not everybody is convinced that pooling resources works in the interest of customers. Kensington Mortgage Company outsources its inquiries to Newcastle building society.

But Philippa Drew, head of marketing, says it insists all staff must be dedicated to Kensington.

"Staff cannot do us part of the time and someone else the rest. They must focus exclusively on our business to offer the highest levels of service."

Securitisation and outsourcing means cost cutting, which has to be good for consumers. But the days of a direct relationship between you and your lender are rapidly fading.