Poor underwriting, adverse credit, self cert, low teaser rates with no thought given to future affordability, large procuration fees; the prosecution charge sheet would be long. Good riddance to bad rubbish sums up the reaction of many pundits. Surely there can’t be a counter argument? I believe there is.
Simplistically, there are three groups of people with adverse credit. Firstly, those unable ever to manage credit responsibly (arguably the perennially adverse). Secondly, those with incomes so low they just cannot afford debt.
Thirdly, the many whose adverse credit is due to life changing events; business failure, redundancy, relationship breakdown or ill health. Why did the old, sub-prime market not discriminate between these customer types? Largely because the market was dependant on gullible investors who really didn’t know what was going on.
It’s surely plain to see that the third group deserves a break. Indeed, not satisfying their needs is economically and socially illiterate. So, how can the industry and eligible borrowers make a fresh start? The answer lies in product development. The old sub-prime model was based on the perceived needs of funders; high underlying variable rates tiered upwards depending on how bad the credit was and made palatable by short-term teaser rates.
Borrowers (especially the first group) would start on a product made affordable by teaser rates, only to slip into arrears when that rate expired. No worries, they could then be remortgaged onto another yet more adverse rate made affordable by yet another teaser rate. What a merry go round – or downward spiral?
Perhaps the answer is to target only group three and do it through intelligent products. Let’s be candid with these borrowers that they represent a risk requiring higher rates, but that in exchange for exemplary conduct their rate will cascade down to SVR in a structured way over time? Surely that is the essence of credit repair? Fortunately it won’t appeal to the perennially adverse, only those who deserve a fresh start.
It goes without saying, of course, that it’s the role of lenders to understand the personal circumstances of the individual and ensure that the adverse credit was a one-off and that they can comfortably afford their current financial commitments.
Food for thought?
Colin Snowdon is executive partner of mortgage strategy at Saffron Building Society
