To talk or write about the specialist lending market just a year ago might have brought the response: ‘What specialist lending market?’ It has certainly been a quiet few years for product sectors such as buy-to-let, sub-prime, self-certification, and secured loans.

Just six months ago, we would have been hard pressed to find much evidence of lenders showing any appetite to lend in these product areas. However, the pressure in the market has started to ease and there has been much more ‘market chatter’ in evidence on new developments.

Recently, there has been a steady stream of activity from the lending community (new and old) which suggests we are likely to have a healthier specialist lending market at the end of 2010 than in 2009. Those firms still in the market, and many of those who left it, are preparing to signal a degree of activity.

The buy-to-let market has probably seen the most concerted push in recent weeks. There have been a variety of developments, even against the back-drop of the new Government’s intended increase to Capital Gains Tax (CGT), which could result in a number of landlords selling off property in order to dodge the increase, rather than planning to purchase more. Having said this, CHL’s research continues to suggest that landlords are much more enthusiastic about adding to their portfolios in the months ahead than at any other time in the last couple of years.

In the face of the shortage of wholesale funding, some investors are keen to get into the market as long as borrowers present a reasonable credit risk. Funding lines which once seemed closed, never to reopen, are being tapped once more. With buy-to-let, there are some notable drivers which suggest that it can continue to offer long­evity as an investment and a strong return. Governmental support will be key for the private rental sector, and one would expect the new Government to follow simply because of the lack of housing supply and the fact that Government house-building is unlikely to be anything but very low (even non-existent) for the foreseeable future.

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All this, coupled with relatively low arrears and repossession levels for the sector, has meant that new and existing lenders have recognised that buy-to-let can be a profitable sector as long as we have learnt the lessons of the past. In the aftermath of the credit crisis, buy-to-let lenders should primarily think about responsible lending, followed by strong criteria and common-sense pricing. A 20 to 25% deposit/equity split seems only right and proper – The Mortgage Works recently raised its maximum LTV to 80% – as does 125% rental cover. Looking at these figures, it seems wholly bizarre that some lenders veered so far from this, yet they did.

With all of these undertakings, it has been pleasing to see new launches in the buy-to-let sector, such as Aldermore and more recently Precise Mortgages from the team at Exact. We have also seen Kensington launching a suite of products for existing landlords. Competition is good in any market, and although I believe we will still see the main two buy-to-let lenders, BM Solutions and TMW, continuing to take the bulk of business, it will be interesting to see the level of business that the newbies can achieve.

Of course, in the buy-to-let market, we also have a number of building societies, notably the Coventry with Godiva, offering competitive products and also showing continuing appetite to lend. There are also constant rumours about Paragon and whether the time is right for its return to the market. The noise seems to be building, which ought to indicate an announcement soon. For our own part, CHL continues to look after its existing book and to maintain its quality, and although we have no plans to begin originating just yet, our existing broker customers will be the first in line when we do.

And this is the good news for mortgage intermediaries and advisers: with the recent new additions to the buy-to-let lending community, the focus from all has been on distribution through advisers. While most are using smaller panels of distributors initially, one would expect this to grow and the fact remains that all brokers should be able to access these products and deals anyway.

Lengthening the credit curve

In other areas of the specialist sector, there have been positive signals, if perhaps less concrete than the progress made within buy-to-let.

However, the two lenders mentioned – Aldermore and Kensington – have made great play in their marketing that they are looking to lend to those clients who may not pass the automatic credit scoring systems of their competitors. The emphasis seems to be on helping those borrowers who may have picked up some adverse credit over the past few years but have now dealt with these financial issues.

I think that this is a positive step. It is lenders pricing for risk and it certainly acknowledges that many people will have been affected by the recession and that their circumstances will have changed in the last three years or so.

We only need to see research which suggests that the recession has resulted in one million more people becoming self-employed to know that we need a lending community that is much more in tune with the changing individual needs of potential borrowers. To my mind, ‘proper under­writing’ is and always has been a prerequisite for those serious about specialist lending – this means not leaving underwriting decisions to computers, but having a human being look at individual cases and making the decision based on a 360-degree appraisal of the case. This will allow the self-employed to continue to access mortgage finance. It seems somehow ironic that at a time when many more people are self-employed, we could be left with a situation which makes it increasingly difficult for this sector of society to gain a mortgage or remortgage, even when they may never have missed a payment previously.

Even in the secured loans sector, which was nearly decimated by the credit crunch and liquidity crisis, we are seeing positive signs. Link Loans, the secured loan lender, recently relaunched after it received funding from RBS Equity Finance. Nemo has also been inching up its maximum LTVs with an increase to a maximum of 85%, while lowering its credit score on its 80% products.

All of this goes to show that the specialist lending market, while not in the rudest of health, is starting to get back on its feet again. This can only be a good thing for both brokers and their customers, but we should never lose sight of the experience we have gone through and the lessons this period has taught us. We are constantly told that the recovery is fragile, and so these positive steps can turn into a hasty retreat very quickly indeed.

Everyone involved in the specialist mortgage market now has a duty to show responsibility in terms of lending, advising and borrowing. Competition is positive, but it should not end up clouding thoughts and deeds when it comes to pricing and criteria. Kid gloves are the order of the day, and anyone getting too carried away with themselves should be reminded of the fate that befell all those who took the same route.

Bob Young is managing director of Capital Home Loans