A number of large, often multinational, financial services’ providers have entered the growing non-conforming mortgage market in recent years, with the preferred route being through specialist subsidiaries. Examples include HBOS acquiring BM Solutions and GE buying First National. It signals a new level of maturity within this dynamic market that has grown from the recognition of a market opportunity in the mid-nineties to a multi-billion pound industry that meets the needs of millions of potential borrowers. This raises a number of interesting questions for intermediaries. First, do the pioneering lenders that launched the market welcome their new competitors and has increased competition led to better products and service standards to the benefit of borrowers? Furthermore, have the rewards and sales opportunities brought by this rapidly growing market reached such a level where brokers simply have to get involved? Many would argue that they should, and for good reason too.
Taking these questions in turn, there is every reason to believe that existing lenders do not see this as a threat. The market has always been dynamic and by its nature, innovative. Such qualities came from the entrepreneurs who had the vision to realise that nearly a quarter of the UK population were being turned away by mainstream lenders for no good reason. In a computer and technology-dominated age, it takes a clever mind to develop a business model that thrives on the opposite, such as replacing computers with people to make lending decisions, and existing players have the advantage.
Keep it personal
The use of highly skilled and experienced underwriters still lies at the core of successful non-conforming lending. Each case must be judged on its merit and a qualitative judgement made about the applicant’s future potential to meet their loan commitments. This involves looking at previous credit problems in context, putting them into perspective, and then assessing the applicant’s current situation and their prospects. If anyone could design a computer system to do that reliably they would become very rich very quickly. These innately human skills are quite different to those of large scale high street lenders whose staff have to go through a dramatic shift change in thinking and approach to adapt to non-conforming underwriting requirements. Old habits have to be changed and new ones learnt.
As well as acting as a barrier to market entry, this has also had an impact on the service levels of those that do enter the market. Intermediaries need a high degree of certainty that an applicant will be accepted in order to avoid a time consuming, costly and frustrating experience for them and the client. Such certainty only comes about if underwriting decisions from lenders are consistent ‘ a result of having well trained and highly skilled people in place. Some established players are very good at this and have built market share and broker loyalty on the back of excellent service. Whether newer entrants can achieve the same levels of consistency in the short term is open to debate.
There are other skills and qualities that set established non-conforming players apart from their mainstream counterparts. A quest for continual innovation is near the top of the list, a quality that started the market in the first place. However, mainstream lenders can be slowed down by their size and their relative lack of experience in this market, which can also make them more cautious when developing new products.
The smaller size of specialist lenders gives them the flexibility to react more quickly. As such, most specialist lenders are able to deal effectively with increased competition from their mainstream counterparts. This ability to react quickly and positively is the reason that established specialist lenders welcome the high street players. A young market like this, which is full of energy and entrepreneurial flair, has every reason to do so. It was, after all, the success of specialist lenders that gave the bigger high street names the encouragement to enter the market.
There is no doubt though that the injection of greater competition has been good for the market and products have been become more competitive as a result. The rate of change is much faster than it was only a few years ago and new product announcements frequently appear in the trade press.
From this perspective, the emergence of mainstream players onto the non-conforming scene has acted as a catalyst for change. But it is not the sole reason for faster innovation. In effect, the market is simply snowballing with a variety of factors contributing to its ever increasing size and dynamism. Established non-conforming lenders are simply responding to increased competition in a positive and effective way and this is further stimulating the market. The challenge to work harder, faster and smarter has been met and returned with interest.
The market has recently benefited from the lowest mortgage interest rates for over 40 years, with rates for the self-employed and those with an adverse credit history getting close to high street lending rates. For example, applicants with a recent adverse credit history can now obtain discounted interest rates below 4% per annum. Interest rates like this show that the convergence of non-conforming and mainstream lending is coming from both directions. The market is maturing at such a rate that the demarcation lines are beginning to blur. Hence, the rather negative term ‘sub-prime’, which was previously used to distance the two markets from each other, is now outdated.
Also, it is no longer reasonable to describe a fifth of the adult population as being sub-prime. There are many varied reasons that may lead to a damaged credit record. Divorce, cash flow when starting a new business and redundancy are all situations common amongst applicants for non-conforming mortgages, but they do not necessarily mean that someone will continue to be a bad credit risk. Typically, these are decent, respectable, hard working people who have experienced incidents in their lives and simply need a helping hand at that time. Terms like ‘specialist’ and ‘non-conforming’ seem far more appropriate for this multi-billion pound market that treats its borrowers with respect.
So can brokers afford not to be taking non-conforming cases? Many of those yet to enter the market still have a perception that there is too much work involved. In reality though, adverse credit cases can be relatively straightforward, particularly as non-conforming lenders make allowances where prime lenders would require full documentation. Packagers can do much of the work in preparing an application ready for submission to the lender. And there are plenty of packagers out there competing for business from brokers. This helps to ensure high levels of service ‘ the main thing packagers are able to compete on.
Brokers that do advise on non-conforming mortgages have realised the huge business opportunity it creates ‘ these people often need insurance products, life plans and investment vehicles too. These borrowers often have higher incomes than those of their mainstream counterparts and many are self-employed. In other words, they are the backbone of modern Britain, the entrepreneurs whose small businesses now account for a sizeable chunk of the UK economy. Self-employed IFA’s and mortgage brokers should be able to identify with these clients
It is also worth remembering that if you can help a client who had previously thought they could not get a mortgage to purchase their home, they are likely to be very thankful. Such goodwill is the starting point for building customer loyalty and ultimately, a larger client base. So the client gets a good deal, a packager does much of the work and for the intermediary, it’s just good business.
Although many mortgage brokers frequently hear about the large potential market for non-conforming mortgages, some have yet to make the leap of faith. This may simply be due to an incorrect perception about how the non-conforming market works. Strange when you think that Datamonitor valued it at £11bn in gross advances in 2001 and has predicted that it will grow to £15.6bn by 2006 under favourable economic conditions. That forecast already looks like an underestimate.
The mortgage brokers that see this huge potential cannot understand why others have yet to start taking non-conforming customers seriously. In time though, this will change. The trick for today’s mortgage brokers is to cast away their old assumptions about clients with adverse credit histories and start making the most of the present opportunity to establish bigger client bases while the market is growing. With increased competition brought about by mainstream lenders, fantastic interest rates, minimal workloads, high service levels and growing awareness among consumers, there has never been a better time to investigate the potential offered by non-conforming mortgages.
Using manual underwriting allows complex cases to be judged on their merits and placed in context.
The market is becoming more acceptable and the term sub-prime is being phased out.
Credit-impaired borrowers may be more likely to demonstrate customer loyalty.