Ten years on from Northern Rock – the evolution of specialist lending

Yes, back in 2007 we were all merrily going about our business unbeknownst of what was about to come (unless you were Vince Cable, obviously). To mark the occasion we take a look at how specialist lending has changed over the last 10 years.

Rules & regulations

We can’t talk about the last 10 years of the market without talking about regulation. The spring of 2014 may have been dominated with news stories of the Mortgage Market Review but there was also the little matter of the Office of Fair Trading handing over the reins of regulation for the consumer credit industry to the Financial Conduct Authority, a move that brought second charge lending in line with first charges.

Magellan was one of the first lenders to be granted permissions. Managing director of lending Simon Read says he’s made no secret of the fact the process was a difficult one.

“However, looking back it was also an informative and collaborative process that added value to our product offering,” he adds.

Say hello, wave goodbye

With the specialist lending sector firmly under the spotlight thanks to the regulatory shift, interest from lenders outside of the sector grew – and continues to do so. Earlier this year bridging lender West One Loans announced its plans to enter the second charge space.

Ray Boulger, senior technical manager at John Charcol, says: “Although the mainstream mortgage market is already very competitive more competition, properly regulated, can only be good for consumers and hence also intermediaries.

“Most of the major lenders have been pretty rubbish at innovation; innovation for them is tweaking their criteria to reverse part of the tightening introduced during the credit crunch, whilst repeating that tired old phrase ‘as a responsible lender.’

Boulger adds: “It is the new lenders who tend to be innovative and with some segments of the market badly served by the major lenders there is plenty of opportunity for new lenders which are prepared to look at what would now be considered niche, such as the later life market, but which 10 years ago were mainstream. There are more new lenders planning to launch this year and next, some with very innovative products. As with recent entrants, these are likely to be wholly or largely intermediary focussed, as the cost of setting up any direct to consumer volume proposition makes using intermediaries far more cost effective.”

The influx of new entrants has, however, sparked fears of overcrowding. While second charge lending is increasing – with the latest figures for the Finance & Leasing Association showing the number of people taking out a second charge is now at a nine year high – there are concerns the market has not grown enough.

Magellan’s Read continues: “We’ve seen the benefit to borrowers of the increased competition in this sector through the reduction in borrowing costs, however, I don’t believe there’s much movement left.

“So I honestly don’t think there’s much more room left for new lenders who aren’t bringing innovation to the market. We’re lucky to be in a sector of the market seeing growth but many people are already questioning whether the current specialist lenders can all achieve their lending targets as the total targets outweigh the current lending by some margin.”

But while new lenders came into the sector, the number of advisers specialising in the area has apparently fallen. Indeed, talent and recruitment remains a concern.

“The biggest change in this sector has been the massive reduction in mortgage advisers who operate in the specialist mortgage sector,” says Read. “There is no doubt this reduction has had a detrimental effect on consumer awareness of the sector which is now almost non-existent if you look at the sector’s lending figures when compared with the over 10 million consumers whose personal and credit profiles suggest they need the flexible and innovative approach that specialist mortgage lenders offer.”

Extinction and revival of packagers

Along with a reduction of advisers, one corner of the market risks extinction – packagers.

Phil Whitehouse, managing director of MCI Mortgage Club, says: “At the start, a few packagers were the main players and in many respects the pioneers of the market as we see it today. Almost all specialist business went through a handful of firms which not only processed the case but also generated much sort after distribution.”

“With the credit crunch, that packager model almost disappeared as the market contracted.”

Whitehouse continues: “When the market started to reappear, it was with a much larger group of specialist distributors and the word packager almost disappeared altogether, to be replaced by organisations doing specialist residential, buy to let, secured loans, bridging and commercial cases.

“The market has indeed got much more complex and these new breed of specialist distributors need knowledge and technology more so than ever to sort out deals. There may not be enough business around to feed the mass of specialist providers that have appeared and so I see some further consolidation in that market, perhaps leaving room for bigger firms only.”

Looking ahead

So, 10 years on from the collapse of the financial markets, the specialist sector is unrecognisable to what it was. But have the changes been good or bad for the sector?

“The market is certainly in a better position than it was,” says industry consultant Alan Dring. “It is more credible, more innovative, and more available to a wider group of clients.

“I would like to think that it will retain its current position of relative strength by staying true to its pedigree and that lenders remain specialist in their established areas of expertise. I hope they won’t do what a great number of building societies did in the 1990s and move into sectors they knew little about because they saw rich pickings, but did not have the tools to harvest the crop.”