Ben Marquand Has the credit impaired market now found respectability and is this mainly due to its recent appearance on the high street?
Guy Batchelor I think it has been respectable for some time. If you look at the products the lenders have been putting out over the past few years in terms of fairness and transparency, they mirror what is available on the high street, or in the self-cert and buy-to-let markets. It does help when you have the high street entering the market and we know there are other high street lenders looking to get into it.
David Matthews-Hillyard: The whole trend of the sub-prime market has been to aim for respectability. I don’t think it’s just the high street lenders that are responsible for that. The whole industry has taken on a bit more responsibility.
Steve Sandiford: I would agree, but I would say its appearance on the high street was coming for some time. Certainly in this market it has been respectable for a while. However, I am not sure customers see it that way yet. But its appearance on the high street will help customers see it as just a normal part of life.
Peter Brennan: There have been lessons learnt from past experience. Also with Financial Services Authority (FSA) regulation around the corner, it is inevitable it will raise the profile of the industry and also raise its respectability from the customers’ and possibly media’s standpoint too.
Ben Marquand In the consumer press there is still little mention of credit impaired mortgages. Is the bulk of the responsibility for the growth of this sector down to the work of intermediaries?
Sean Hornsby: I think the key factor is that there has been a massive change over recent years in terms of availability. Not long ago it was difficult for brokers to place that sort of business because they didn’t know where to go. Now it has broadened so much due to lenders and competition, and because there are more brokers involved. It is all down to availability.
David Matthews-Hillyard: It is down to availability, but it is also down to educating the public that they can get a mortgage. I still think there is a huge portion of people who believe they are caught in a trap and cannot get a mortgage.
Peter Brennan: I would suggest the credit-impaired market is actually shrinking. We are seeing a better economy, high employment, low interest rates and if anything, the product offerings for the lifestyle borrower, they are the ones that are increasing. That is where we have to get the awareness right.
Sean Hornsby: I think that applied to the market in general it is amazing there are still borrowers paying interest rates of 8% who have no idea they can walk into a lender and get a better rate. That has nothing to do with the credit-impaired market, that is just mortgages in general.
Guy Batchelor: When customers walk into a building society or bank there’s a barrier. They find they do not pass the credit score and have to pay a higher rate. They expect a certain rate, but will only be offered another, higher rate. Although the high street is important for sub-prime, it is still a broker-based product.
Steve Sandiford: It doesn’t have to be difficult. From a lender’s perspective it’s about pricing for risk and if you can identify what it is about the borrower that means you don’t want to offer them a mainstream deal, you can simply work out where they need to go.
Edward Murray: Do people realise they have a poor credit history and is that what is holding people back? Are they worried about what is available to them?
David Matthews-Hillyard: There are people who know they have an adverse credit history. Others aren’t aware. There is still a big proportion of the market that doesn’t think they can get a mortgage because they have adverse credit. They are too embarrassed to visit a lender and ask – in case they are refused.
Peter Brennan: The beauty of the intermediary market is they take away that uncertainty. The intermediary market is not judgmental. On the high street there is a complete mindset change that needs to happen before lenders will be in a position to provide that transparency. It’s still a question of whether they [brokers] have an appetite for the one in five people who are believed to have an adverse history.
Sean Hornsby: Human nature is the most difficult thing to overcome. People do not like asking for help. There is a stigma.
Edward Murray: Equifax is now allowing borrowers to go online and check their own credit details. Do you think this will help people who have a chequered credit history realise where they have had problems and be able to sort it out?
Colin Barrett: I don’t think that will help borrowers. It will not make them more confident knowing they have a bad credit record. You have to remove the stigma for people to feel comfortable. You don’t sit at dinner party and say ‘I’ve just got my sub-prime mortgage.’
Ben Marquand: With pricing getting closer to mainstream, aren’t we storing up more credit problems for the future if there is an economic downturn?
Peter Brennan: The truth is we, as lenders, are all aware that we must price for risk. We don’t deserve to survive if we can’t get the pricing right.
Jonathan Cornell: In life, the people who do not have the money to pay end up having to pay the most. It is helping people to repair their credit rating.
Guy Batchelor: Credit repair is exactly what we are all doing. Most products have redemption periods of two years. We don’t have many borrowers left after 39 months. We need to charge a little more, but then they go. Pricing is one thing, but credit impaired lending is also about the products’ flexibility and understanding risk.
Steve Sandiford: They are just the same as self-cert customers who have a different need. We have to treat them in the same way.
Simon Biddle: Many of us have pricing models going back eight years. The experience is there for prices to come down.
Ben Marquand: So if it is now safe for lenders to cut prices, where do we go in terms of product development?
Simon Biddle: The sky is the limit. The problem for the mortgage industry as a whole is where the next innovation will come from. The non-conforming side is about giving the consumer what they want.
Sean Hornsby: If you are going to treat them as ordinary borrowers you can’t then turn around and say ‘you can’t have these products’. Competition is so strong and will become even stronger that all of you as lenders will have to look at being innovative in terms of your product ranges.
Peter Brennan: One thing the industry has done to date is accept that once credit impaired, not always credit impaired. That’s what the high street is waking up to. Has the high street helped on respectability? No, but it has recognised the cycle of those borrowers who have historic financial difficulties and are now back on track.
Ben Marquand: What will be the biggest distribution outlet in the future? Will brokers lose out to the high street, and what will online applications mean for packagers?
Peter Brennan: They have all got a part to play. As the market opens up and the range of products becomes more diverse, if anything the profile of the intermediary will be even higher than it is today in helping the end borrower make the decision that’s best for them. The high street will be there; the online providers will be there too. But we will always have intermediaries operating very successfully in this market.
Steve Sandiford: Some customers will want to go to brokers others the high street, but they will not go to either if they do not provide the products.
David Matthews-Hillyard: We are a packaging company and most of the brokers we get business from deal with eight high-street lenders. They find it difficult to deal with a lender direct because they think they will get it wrong. That is where packagers have a role to play in ensuring cases go to the right lenders and making sure they stick. I am not sure whether online facilities actually help brokers that much in this sector.
Steve Sandiford: I would agree. I do not think most systems up to now have done that, but I think they will have to in the future.
Peter Brennan: The problem is that it is not a one-size fits all sector.
David Matthews-Hillyard: That is where the skill of a packager comes in – to find the right deal. The sourcing systems don’t work hard enough on that. They are good at tailoring the rates and ensuring the client is aware of the costs and fees, but they don’t give enough information.
Simon Biddle: That is because most of the sourcing systems were built for the conforming market.
Sean Hornsby: I don’t think that is correct about sourcing systems. The biggest issue for us is the majority of intermediaries don’t bother looking. You can source a product in so many ways. One of our features is a browse facility. That is used the most by our subscribers and it is the most dangerous. There is an element of the broker already knowing which lender they will use.
David Matthews-Hillyard: I agree some software is better than others.
Sean Hornsby: We can input loads of information, but is there any point in doing so? I don’t think so. It is more about educating brokers in the first place.
Simon Biddle: Perhaps it is a call to lenders to simplify credit-impaired products.
Steve Sandiford: Packagers have offered that sort of service to brokers, but lenders will have to start to do the same.
Jonathan Cornell: I will admit that Hamptons doesn’t do much sub-prime business. But it has used packagers and they have provided a reasonable level of service.
Peter Brennan: It comes back to core competencies. We will end up with specialist brokers who will provide advice to the end borrower, and you will see a polarisation where we all work in the areas of our core competencies.
Sean Hornsby: About 60% of our subscribers are now IFAs and we are making them aware of sub-prime products. Going back four or five years, there were a lot of financial advisers who didn’t know what to do with these cases, but this is now changing.
Guy Batchelor: We are also seeing more IFAs becoming involved in the mortgage market. They tend to be well established IFAs. They are not selling ISAs or pensions at the moment and are going into mortgages. But they are going to the packagers.
Ben Marquand: If this is the case, will BM Solutions not end up hurting itself with its recent stance on packagers?
Steve Sandiford: We are making it easier for people. Brokers are starting to understand this sector is not that difficult. We want to make it easier and demystify it.
Sean Hornsby: I think the next 18 months will be interesting. Assuming all the proposed Principal firms survive and start to have controlled distribution through lending panels, where you can lose out is if all these brokers who use you today are not being able to use you in the future.
Matthew Bright: I believe some of the more enlightened and confident Principal companies will be providing compliant solutions to enhance an appointed representative’s business even in areas which don’t actually tie into a panel. They will just provide cover if they want to go to BM Solutions through a packager in a compliant fashion.
Sean Hornsby: Some will, but there is no doubt others will have controlled panels and some of the biggest players in the market are definitely going down that route. Certain lenders are prepared to do a little bit more to be on a premier panel of a distributor. By having that panel, providing it covers the relevant segments of the market that distributors will actually get better deals from that panel than are generally available in the market.
Matthew Bright: I am sure the FSA will be looking at the role of exclusives and how fair and appropriate it is for an industry that is supposed to give best advice. How can you compromise the customer through one channel because they ‘accidentally’ went to one broker and not another?
Steve Sandiford: Pricing isn’t just about risk – it is about the cost of acquisition. Any lender will take that into account. They would be crazy not to.
Ben Marquand: But will the FSA sit comfortably with that?
Sean Hornsby: I see that as no different to pricing for an online proposition.
Guy Batchelor: As long as the consumer isn’t disadvantaged, is it a problem?
Peter Brennan: It’s about how good these innovators are at getting the product to the borrower.
David Matthews-Hillyard: If the borrower has a choice of going online for whatever they perceive is the best rate, it’s up to them. It’s their choice as to how much help they get in getting the mortgage.
Peter Brennan: There are parallels in other industries. We do see differential pricing. But it’s also up to the consumer to understand what’s available.
Ben Marquand: Are you concerned about the prospect of a switch to long-term mortgages?
Simon Biddle: I think it’s an excellent idea. We have seen more peaks and troughs in the UK housing market than in the US.
Guy Batchelor: But they refinance more often over there.
Peter Stimpson: There are also (tax) discounts on long-term products. It might bring stability for UK borrowers.
Jonathan Cornell: If we are looking at credit repair mortgages, then it might not be in their best interest to be on a deal for such a long time.
Peter Brennan: And people like the flexibility of two-year fixed rates. I don’t think borrowers in the UK will want to fix for the very long-term.