The credit crunch that has blown in from the West stems from the collapse of the US non-conforming market.
Lenders allowed poor credit risk borrowers to take out loans that were affordable initially, however when higher rates kicked in and, when the owners defaulted, they were kicked out.
Nobody bought the property, so trillions of dollars had been wasted on derelict housing. Banks that invested in associated bonds lost out. The end result is that there is less money available to borrow across the global market.
Fraud
A television programme highlighting this problem portrayed borrowers as innocent victims of aggressive sales techniques. They were shown as ignorant of the terms and implications of the mortgage contract.
While I have not heard of any reports of mis-selling, it is reported that the FBI is investigating 14 firms for fraud. It seems sales of such mortgages are not as regulated as they are in the UK.
We can only thank our regulatory regime that we are not likely to face the same degree of upset as in the USA. However, non-conforming lending in the UK is not without its dangers.
Victim mentality
The nature of non-conforming is that mortgages are advanced to people who have a history of poor financial management. So the lender is taking a risk with this customer. So too are brokers.
As we can learn from those who default on credit card payments, the tendency is for many to blame banks for encouraging them to take on credit they cannot afford to pay back.
These people have a victim mentality where they blame everyone else for what happens in their world.
Reducing the risk
To ensure that you are not the true victim of nefarious claims, your systems and controls and evidence of best advice have to be absolutely watertight.
Does your research prove that customers failed to meet any lenders’ criteria for a prime mortgage? Do your records prove that customers were aware of the full terms of the contract, including their duties and responsibilities? Do they show that, not only did customers understand those terms but also that they accepted them fully?
By this I mean any doubts and uncertainties were addressed and fully understood and accepted by the customer, and duly noted before action was taken.
Of course, this philosophy applies to all contracts and all customers. However, brokers often build up a mutual trust with their clients and action is taken by tacit understanding. In a compensation culture, there is no such thing as tacit understanding.
Only open, complete and thorough explanation and understanding is acceptable to avoid any possibility of a claim for professional negligence.
When mortgage advances are harder to obtain, the role of the broker comes to the fore in getting the best possible deal for the client.
Successful business people understand that growth is built on a solid foundation, and part of that foundation is reducing risk. Independent advice adds great value to the client but should never be at the cost to the business.
