Adverse, sub-prime or non-conforming, whatever your preferred phrase, it may conjure up a dismal vision of a client with an unpalatable credit rating. If a client’s credit history does not meet the criteria laid down by the mainstream lender, many advisers will let these clients walk on by.
Who can blame advisers for thinking this way when many have experienced difficulties in the past. Five years ago, the only acceptable lending avenues available were the high street and centralised lenders. Obtaining a mortgage for an applicant with even a minor county court judgement, was far from easy. All too often, advisers would find themselves mediating between a reluctant lender concerned with performance profiling and a frustrated client with a logical reason for incurring a minor credit problem.
Of course the non-conforming market is very different today, but some advisers are still reluctant to involve themselves with this sector. The fact is, this specialist market has become exciting, both in terms of its continued growth over the last five years, and the immense opportunities it presents to advisers and their clients.
The original definition of a non-conforming client related to anyone who did not fit the standard profile used by high street lenders. These often excluded the self-employed and those with county court judgements or other factors that made them unattractive to mainstream lenders. To a great extent this definition still stands, but over the past 12 months we have witnessed the emergence of a number of new sub- definitions. Phrases such as ‘light adverse’, ‘minor credit-repair’ and ‘deep adverse’ have appeared on a growing number of lenders’ criteria sheets.
Two years ago, non-conforming lending was dominated by specialist lenders such as Kensington Mortgage Company and Platform Home Loans. However, more lenders have moved into this sector as the fight for market share has intensified, forcing niche and mainstream lenders to look in other directions to satisfy their lending objectives. Elsewhere, margins have reduced and sub-prime now offers higher returns to lenders. While some of this new activity is not strictly sub-prime, it is a definite move in this direction.
This has provided greater resolution, creating a more diverse range of product offerings. Previously, there was a clear distinction between prime and sub-prime and attitudes were firmly set. However, the gap between the two definitions is closing, resulting in more competitive pricing. For example, some niche lenders will lend up to 95% loan to value accepting up to £5,000 worth of county court judgements with only a slight difference in price to their standard products.
The reason why advisers should be seeking this type of business is two-fold. First, when you look at the typical customer profiles they are not just those with credit problems ‘ it can be the self-employed, company directors and IT consultants, or anyone with more than one income stream.
Many clients who have experienced credit problems have done so for understandable reasons, such as a marital split, or previous incapacity through sickness or injury. Advisers can steer disappointed clients towards sub-prime and niche lenders, who are willing to take a lateral view.
Most advisers would agree the best source of generating leads for other areas of financial services is through mortgages. With an upturn in demand for mortgages, the market is currently ripe for advisers to provide this type of professional advice.
Keeping hold of clients can prove difficult in a climate where banks, supermarkets and even football clubs are trying to cross-sell an array of financial products. This illustrates another reason for an adviser to be involved in this sector, because if help can be provided to a client when they most need it, they are likely to remain loyal to them.
Historically, the average life of a mortgage was five to seven years, but this has continued to reduce at a significant rate. With the demise of redemption tie-ins, many mainstream lenders are searching for ways to stop customers jumping from one rate to another. The specialist sub-prime lenders, however, are happy for clients to move away once their credit rating has been restored.
Advisers have a big part to play in the review of how long the client stays with the specialist product. Contacting clients just before the redemption penalty period expires is an ideal time for a financial review. Offering any number of new deals, which save the client money, can only serve to further consolidate customer loyalty.
The advantages of operating in this sector are plenty, both in terms of valuable business today and building business for the future. But how can advisers ensure the best terms are delivered to their client? This is a real concern with the growing range of product options, tempting procuration fees and increasing number of new sub-prime definitions.
The immediate financial rewards for utilising sub-prime lenders have raised the issue of whether applications will be submitted which perhaps do not belong in this category. While sub-prime lenders take a more objective view of customer circumstances, they are not equity lenders, and as such they must understand the nature of the risk. Where this is not provided, information will be sought from the adviser before the lender will proceed any further. Some lenders go a stage further, only accepting business on certain schemes where credit problems can be proved.
If the client falls into a ‘minor adverse’ category, it may be possible to obtain mainstream terms. However, finding a sympathetic view towards the client’s personal situation could prove tricky. Whether the case is acceptable or not will be determined by the complete picture of the client’s circumstances. The underwriter will examine the customer profile, with a particular focus on job stability, financial management, affordability and the equity stake. Obtaining a decision in principle for this type of case has to be the first course of action, and an essential one if the lender credit scores.
Utilising a generic application form could prove advantageous. If a lender requests additional information which may not be available, or declines the application, it can be switched to an alternative lender with minimal disruption to the adviser and the client.
An experienced mortgage network or mortgage desk facility will assist the adviser to find the best deal for the client, providing it has a balanced mix of mainstream, niche and sub-prime lenders. Some of the established organisations will have access to ‘decision in principle’ facilities which are not available with some lenders.
Although sub-prime lenders may see some market erosion particularly with lighter adverse customers, this is unlikely to be extensive. The lenders who prosper in this market will have service and underwriting skills as an absolute core strength. Price has become a more pivotal factor, but remains secondary to underwriting expertise.
Sub-prime may signify a change in strategy for some advisers, but with growing competition and increased product choice, the opportunities to provide skilled advice to a wider range of customers are plentiful.
Clients falling into the minor adverse category may still be able to obtain a mainstream mortgage.
Networks and mortgage desk facilities help brokers match clients to products.
Underwriting expertise is more important than price when choosing a sub-prime lender.