Peter Williams, executive director of the Intermediary Mortgage Lenders Association (IMLA), explained that while there will always be risks associated with subprime and near-prime lending, it was also important to balance this with providing solutions for underserved borrowers.
The US mortgage market recently witnessed the first signs of a comeback of subprime mortgage deals, with the first agency-approved securitisation of a subprime loan since the financial crisis taking place last month.
Fitch, which rated the deal, called it a “trailblazer”, explaining that its agency-rated status gave more certainty to the investor on its risk of default. It added that it was “very possible” similar deals will emerge later this year.
Risky, opaque subprime mortgage securities were criticised for sparking the 2007-08 mortgage crisis in the US. Investors were unwittingly overexposed to poor quality loans, marketed as a good credit risk, which began to default when house prices fell and interest rates rose resulting in a rising number of repossessions.
But in a Mortgage Solutions poll of 114 respondents, almost half of readers appeared sceptical that the mortgage market has learned its lessons from the credit crunch. Just over a third of readers felt that the market now demonstrates sufficient responsibility while 16% remained unsure.
Williams said the Financial Conduct Authority’s (FCA) significant intervention in the market since the crash should ensure it had learned its lesson.
“The recent securitisation deal in the US shows the market for residential investment is steadily reopening, which is a healthy and positive step forward.
“Clearly there will always be risks with sub-prime and near-prime lending, but there is a need to balance these risks with the need for such products among creditworthy borrowers and for these loans to be securitised along with prime mortgages. Securitisation is an essential source of funding particularly given the current savings market,” he added.
“A subprime revival is likely, but not immediately, and is the next step in opening up the market after the spate of launches we have already seen in the ‘near-prime’ sector.”
Tony Ward, president and CEO of Clayton Euro Risk, said the funding constraints and the state of UK regulation meant it was unlikely the market would see the comeback of subprime lending any time soon.
However, he added: “If you didn’t have the regulatory constraints around the market, some people would probably spot an opportunity and go for it, but that’s just human nature unfortunately. I think there is an opportunity there because there are many more niche areas of the market than there were nine years ago.
“Lending to self-employed customers is no longer a no-brainer, because it’s so much harder to deal with the obligations set out by the Mortgage Market Review (MMR), which is coupled with the major lenders commoditising what they do to save on costs and meet regulatory requirements. So this has created an underserved section of the market, which I’m sure the FCA was not intending to create when it implemented MMR.”