Are sub-prime products likely to come back in the next few years and can it really be justified?
Offering thier view in Market Watch this week are:
John Wriglesworth, managing director of the Wriglesworth Consultancy
Ray Boulger, senior technical manageer at John Charcol
David Sheppard, managing director of Perception Finance
John Wriglesworth, managing director of the Wriglesworth Consultancy
Clearly, the mortgage market has not returned to health despite being nearly five years on from the demise of Northern Rock.
While high unemployment, compounded by the fear of unemployment and the ever present threat of European meltdown, are increasing the likelihood of another recession, these factors do not explain the impoverished state of the housing market.
Despite historically low interest rates, resulting in mortgage rates being practically zero in real terms, house sale volumes are nearly half what they should be.
In my view, the key reason for the moribund housing market is the total reluctance of lenders to offer balanced ranges of mortgages that meet the demands of all types of customers.
Presently, only the most affluent and “safe” customer groups can get a mortgage. For the aspiring first-time buyer without many thousands of pounds of savings or individuals with a slightly tarnished credit history, mortgage products are still practically nonexistent.
If suitable sub-prime products were available, significant extra demand for home purchase would return.
The problem is that lenders, inhibited by ridiculous capital constraints and a regulatory authority that has no interest in encouraging lending, are being forced to service only the safest customers in the market.
Without a balanced portfolio of specialist mortgage products on offer, including 100% LTVs, sub-prime and buy to let, the housing and mortgage market will not recover.
However, the good news is that the trend towards a wider range of mortgage products has begun, albeit slowly.
What could help speed up this road to recovery is the introduction of a government-backed mortgage indemnity guarantee scheme that can protect both the lender and the borrower from the risk of high LTV lending.
Ray Boulger, senior technical manager at John Charcol
The return of a healthy sub-prime market would not only be welcome, but also justified. However, in reality, this is a long way off.
The excesses at the peak of the market were largely driven by a small proportion of lenders, coupled with too much mortgage funding chasing too many customers too far down the risk curve.
Much of the sub-prime market was funded by mortgage-backed securities and, although the RMBS market has re-emerged in a modest way, it is only open for low LTV prime and high quality buy-to-let mortgages.
Furthermore, the impending banking crisis as a result of the eurozone fiasco is likely to set back even this nascent market.
With current tight lending criteria, the definition of sub prime in today’s market includes many people who used to qualify for a mainstream mortgage.
Based on the current low and falling arrears figures, most of these borrowers must be meeting their commitments.
This is pretty compelling evidence of a genuine market need waiting to be satisfied by any lender brave enough to think outside the box and offer what in today’s market would be described as a niche product.
A good place to start would be a credit repair mortgage with a basic requirement that the applicant incurred no new adverse credit in, say, the last year.
A premium rate would be charged in the first year, reducing in each of the next two years subject only to all mortgage payments being made on time.
After three years of an unblemished payment history, the mortgage should offer a guarantee that the borrower can switch to a new rate from any of the lender’s current new business range.
David Sheppard, managing director of Perception Finance
As the economy strengthens over the coming years, I believe that we will see a few lenders looking to target more of the niche market across a number of different sectors that are currently not being entertained.
We already have Aldermore trying to offer something for those with no deposit. Although the take up of this will be selective, it is interesting to see that innovation is already being considered by those lenders that want to offer something different.
Historically, the sub-prime part of the market was catered for by non-high street lenders. These are returning, but it is early days yet on what they are looking to promote.
For now, I would say that the market has it right. That is not to say that there are not clients who are interested in a mortgage, but can’t get one right now.
However, having come through the recession and into a fragile recovery, we have to accept that the lending that there is needs to be sensible.
To say that the housing market will not recover without a healthy sub-prime market is not something I would agree with.
I do think that we need a market at 95% lending and also a better understanding of the self-employed sector, and these two things would be beneficial to growth.
If we can get these sorted, then we can look to what needs to be done for sub-prime.
Over the next few years, I feel that all lenders will be in a better position to provide finance to those that they currently will not.
In part, through the current recapitalisation process that is being carried out, but also because, as margins are squeezed on the lending that is currently available, it will make lenders want to expand to maintain profitability.
