It is known by many names, credit repair, heavy adverse, subprime, complex prime – in essence, adverse mortgages are loans tailored to those with an impaired credit history who cannot obtain funds from mainstream sources.
On the face of it, lending to those with subpar credit histories may conjure flashbacks to the financial crisis a decade ago, but Torpey (pictured) argued that not only do these consumers represent an underserviced sector – they can be lent to in a prudent and responsible fashion.
Crucial to this, said Torpey, is 100% manual underwriting.
“We individually assess every application, it’s all manually underwritten, and we don’t do any credit scoring,” said Torpey.
He continued: “Customers who haven’t had any defaults might be considered very high risk for various reasons, versus someone who may have had five defaults two and a half, three years ago because of a failed business or a divorce – but they have a very strong income and will be back on track in a number of years.
“A big part of that is a very thorough review of bank statements for a minimum of three months and up to six months to understand the affordability of the customer.”
No right or wrong
When asked whether this could lead to introducing risk into the system, Torpey said that a detailed analysis of a borrower’s income and expenditure patterns can give a better insight into affordability than credit scores – and is therefore prudent practice.
“For me, it’s all about individual assessment to understand what has caused [the impaired credit],” he continued.
“There is almost no right or wrong – it’s about understanding all the facets of why they went into it, what’s been the journey from when they went into it and what they look like today.”
He continued: “How long have they been on a debt management plan (DMP), or an individual voluntary arrangement (IVA)? What has changed since then, have they managed to pay it down materially? Has their income changed?
“Going forward, has the event which caused the DMP or the IVA passed, has there been a sufficient period of time, has the person sufficiently recovered to be able to take on debt again?”
Torpey added that careful selection of adverse cases also shields those borrowers from any rise in Base Rate.
Torpey said: “Is that any different for a prime customer versus an adverse customer? We stress at 300 basis points, and 95% of our loan book is fixed rate for two, three or five years.
“In theory, 300 basis points stress is your minimum. So clearly if the surplus is very low after the stress, that’d be a case where you would scrutinise closely on whether it is an acceptable risk for us to take.”
Since launching in the UK two years ago, Torpey said that of almost 750 adverse accounts, only two to three are more than 60 days in arrears.
“We’re probably one of the more accepting in terms of adverse credits or credit repair,” Torpey continued, “but our performance has been exceptional.”
Bluestone offers deals with a maximum 85% loan to value (LTV) for borrowers with up to four defaults and three CCJs within the last three years. The lender also allows IVAs, debt relief orders (DROs), and bankruptcies.
Although Bluestone’s products are open to adverse borrowers, Torpey stressed that it makes up for a comparatively small part of its lending.
Around 80% of Bluestone’s business sits within the ‘clear’ and ‘AAA’ categories, with around 5% of cases are ‘BBB’, and the remaining 15% in the ‘AA’ and ‘A’ bands.
Safe but not risk free
Laith Khalaf, senior analyst at Hargreaves Lansdown, said the adverse market of today is a far cry from the lead up to the financial crisis.
“It seems to me that lending market is safer now than it was ten years ago,” he said.
“In the bigger picture, regulation has made lending safer, but that’s not to say that it’s entirely safe.”
Indeed, UK Finance data painted a picture of increasing stability.
The UK Finance data showed that that the number of loans in arrears by more than three months has been dropping – falling from 124,300 in Q4 2015, to 102,800 in Q4 2016, and 90,300 in Q4 2017.
Across the same period, properties taken into possession fell from 2,200 in Q4 2015, 1,900 in Q4 2016, and 1,800 in Q4 2017.
Khalaf continued: “Looking forward – with interest rates going up, you might see a slight uptick in bad loans, but not to such an extent that it will cause huge amount of financial stress across the board.
“Unless there’s an economic shock, it seems unlikely that you will get widespread defaults.”