‘Unmet demand’ and high lending margins suggest specialist mortgage market yet to peak – exclusive

An IMLA (Intermediary Mortgage Lenders Association) report passed exclusively to Mortgage Solutions confirmed the market will be driven by the increase in self-employed workers to 4.8 million (15% of the UK workforce) last year against 13% in 2008 and the rise in staff on zero hours contracts to 910,000. A record number of County Court Judgments (CCJs) were also issued against consumers in England and Wales in 2016, a 25% rise on 2015.

IMLA said mainstream lenders have shown a muted appetite to compete in this market constrained by regulation, governance and conduct risk issues. This factor was likely to drive up margins for the specialist and challenger bank lenders targeting the market.

IMLA estimated the “overwhelming majority” of the £17bn specialist market was buy-to-let, with all specialist residential lending amounting to £3bn last year.

“This points to very high potential growth in the market even if specialist residential lending does not regain its previous highs,” said the lender trade body.

Transformation

Specialist funding has transformed since the credit crunch with the securitisation tumbling in importance as a funding route since 2007, both for placed issuance and retained bonds where lenders keep the loans on balance sheet.

The new generation of lenders prefer to sell whole loans, like Fleet Mortgages, which sells loans to asset manager Blackrock, which it sells on to investment vehicles. Others like The Mortgage Lender sell loans to asset manager TwentyFour Asset Management, which securitises the loans.

However, the mainstream lenders have access to cheaper customer deposits and Bank of England funding including £100bn through the Term Funding Scheme introduced in August 2016. Challenger Banks and building societies have also taken cash from the TFS including Paragon and Charter Court Financial Services, however with the scheme-end in February 2018, securitisation is likely to return strongly.

Regulation irony

The Prudential Regulatory Authority changes to portfolio lending became law on Saturday, bringing in tighter underwriting and affordability requirements for landlords with four or more mortgaged properties.

Peter Williams, executive director of IMLA, said the irony of greater regulation is that it enhances the role of specialist lenders because it makes buy-to-let lending more complex.

However, on the prospect of more regulation beyond those still bedding in, including Stamp Duty changes, he said his instinct is that the government is unlikely to want the fight. “Without a strong majority and with 25% of MPs being landlords, my instinct is that they just won’t want to rush in,” he said.