In the ten years since the crunch we’ve seen regulation in the specialist sector, plenty of new products and increased interest from consumers, but what would you say has been the biggest change in the last decade?
The biggest change in the sector is in its size and distribution. The second mortgage (then secured loans) market, for example, was an estimated £7bn market. The market is now broadly £1bn per annum.
In 2007, the larger proportion of the business came from customers applying directly to specialist brokers who placed them with a lender. Now the larger part of the market comes from mortgage advisers, independent financial advisers and other introducers passing customers for whom a mortgage or remortgage may not be the most suitable option to specialist brokers and packagers. There are no large, specialist direct to consumer brokers in the sense there were a decade ago. Business in this sector is picked up by the large comparison websites as one of their many products. As a result I would say that the end customers are less aware of specialist products such as second mortgages than they were 10 years ago.
Secondly, regulatory changes have shaped banks’ attitudes towards risk, making it harder for SMEs or for those with less than perfect credit to borrow. The increased level of regulation in the specialist sector now provides far greater transparency and a genuine choice between products. With first and second charge mortgages now falling under the same regime, mortgage advisers and IFAs have the confidence to offer specialist products to their customers. As a result the space has opened for new lenders and non-banking financial institutions to offer competing services and I believe the market will continue to grow from strength to strength.
We’re seeing more new lenders coming into the specialist market of late – is there room for them?
Yes, there is room, but only for lenders who bring innovation, differentiation and vision. Regulatory pressures, risk management and early technological advances are creating a challenging environment, which needs new lenders who can identify, understand and satisfy customer’s needs and demands. We have enough ‘me too’ products with ‘me too’ processes fighting over rates. The current lenders in the market have more money to lend than they are currently lending. I believe there a huge number of customers in the UK who have a need for specialist products and it is up to the specialist brokers to find a way of increasing awareness. That is all about investment and innovation.
Do they have different offerings from the lenders operating before the downturn? Or are we starting to see similarities between the market as it was then and the way it could be heading?
The Northern Rock crisis and the crisis that followed was created by a spectacular growth in debt secured on property assets. Homebuyers and lenders all believed that house prices could not fall and this along with a complete irresponsibility in lending criteria, ultimately lead to the global collapse.
Ten years later some of the macroeconomics are similar. We are still faced with static incomes, expensive housing and rising debts which has led to disillusionment with the establishment and the traditional banks and corporations that underpin society. The difference today is that house prices are not being driven by irresponsible mortgage products that people can’t afford, they are being driven by a severe lack of supply of homes for sale as well as near record low mortgage rates. Regulation has been the key development in the last 10 years in the specialist market and will help to ensure there is no return to the overly aggressive lending that lead to the crash – certainly in the UK.
The light touch OFT regulation of the past is nothing in comparison to the rigorous and comprehensive policing offered by the FCA. This is a very welcome change as it ensures the level of professionalism, service and advice offered by firms in the space improved dramatically. This has certainly helped to increase the credibility of a second mortgage as a mainstream alternative. Second mortgages can be a useful product especially when taken in the wider context of a longer term financial plan a mortgage adviser or IFA has for their client. Consumers can use them for a wide variety of reasons – including home improvements, or paying the deposit or removal costs for a son or daughter moving into their first home.
Is the market as it stands today in a better or worse position than it was in 2007?
I don’t think you can say ‘better or worse’. It is too complex a topic to break it down into a binary decision. Personally I think there is not enough differentiation between lending products, which is a bad thing for quality customers who don’t fit ‘the box’. I also think underwriting criteria in certain areas is still too tight. Lending products can be expanded sensibly and responsibly with more thought and innovation. In the wider market I think we have a bubbling problem with interest only mortgages coming to the end of their term and it is great to see specialist lenders such as Shawbrook Bank with their Over 55s product trying to provide solutions to significant national challenges such as these.