Almost 23% of adults aged between 18-65 would be refused credit from high street lenders if they were to apply, according to the latest research from Datamonitor.
Of the 8.3 million individuals falling into this bracket, only 18.4% have a mortgage compared with 40% of the population as a whole, suggesting massive growth opportunities for lenders in the non-conforming market.
In 1999 gross advances in the non-conforming market reached £5.9bn, accounting for 5.6% of all mortgages and representing an increase of 19% on the previous year. Datamonitor forecast that by 2005 the market would rise to £6.7bn.
Joseph Dlutowski, chief executive officer at i-group, said: “This is a ringing endorsement of the industry and proves that it is coming of age. More and more lenders will want to get into the market offering products relevant to brokers and borrowers. The days of stigma are gone.”
However, Dlutowski added that lenders will have to gear up to cope with the added volumes of business.
“The onus will be on all lenders to have infrastructures and systems in place to offer back-end support. Many sub-prime lenders fall down in this area. This report brings the sector to the table for the first time and if we cannot cope with the demand we will continue to trip up,” he said.
Platform Home Loans is ploughing resources into this area to cope with the expected increased business levels.
David Tweedy, managing director, said: “We are recruiting more staff and working on training and improving our services. We should be able to cope with increases in volume because we use our own staff rather than outsourcing. We are also looking at diversification of funding, such as through long-term bank loans, corporate debt and whole loan sales.”
However, Michael Bolton, marketing manager at Future Mortgages, said the report’s growth forecasts were somewhat conservative. He estimates that by 2004 growth is likely to be much closer to £10bn.
“Given that 23% of the population is non-standard, it implies there is more room for growth in the market,” he said.
The growth, in what the report termed ‘the credit underclass’, has stemmed from the increasing use of automated credit scoring, where in the past decisions often came down to the discretion of a bank manager. It found that this removal of the ‘personal touch’, employed by high street lenders to drive down cost, has resulted in the loss of £15m potentially profitable business in 1999.
Tweedy said that he was conscious of this. He said: “We see a number of applications come our way that have been turned down by high street lenders, but cannot be described as non-conforming.”
He added that in these cases, the application is returned to the broker.
But while the market is enjoying massive growth, the report predicted large levels of consolidation in the market.
It said: “High barriers to entry, namely the difficulty of acquiring underwriting expertise, will lead to a spate of merger and acquisition activity both among non-standard lenders and from standard lenders attracted by the high margins in this niche.”
While Tweedy said that he was not aware of any players in the market that were involved in any merger and acquisition activity, he described the likelihood of future consolidation as a “reasonable prospect”.
He said: “Companies with less access to capital and a lack of infrastructure may consolidate in the future.”
Dlutowski, however, described consolidation as inevitable. “As products become more competitive and margins tighten, smaller players will find it harder to exist and it will be the natural course for some players to merge and for others to be acquired. This could involve bigger lenders coming into the market.”