It has traditionally been the case that when members of the Bank of England’s Monetary Policy Committee (MPC) speak, everyone listens.
In the current era, governor Mervyn King has used his speeches with great effect, especially when his comments have delivered warnings around levels of indebtedness, house prices and the future direction of the Base Rate. King knows his words have weight and the market will respond to them.
Recently, the Financial Services Authority (FSA) has also adopted this tactic of using speeches by its senior team to deliver a particular message.
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The recent speech delivered by Clive Briault, the FSA’s managing director of retail markets, to the Building Societies Association’s 2007 conference was part of this strategy and focused particularly on the non-conforming mortgage market. It is clear that the FSA is concerned about this sector, particularly in light of the troubles its US counterpart has had.
Catching a cold
With rates rising, and many commentators expecting further increases, the FSA has determined that now is the time to warn both non-conforming lenders and brokers about their responsibilities when it comes to borrowers with adverse credit. The FSA deems this part of the mortgage market ‘high risk’ and it is concerned about the potential for consumer detriment if this market, for want of a better phrase, ‘catches a cold’.
It is perhaps understandable that the FSA deems this a potentially ‘vulnerable time’ for non-conforming borrowers. Not withstanding the rise in Base Rate over the last year or so, we have also seen higher than inflation rises in council tax payments which are clearly going to bite on all borrowers, but perhaps most significantly on non-conforming borrowers. These borrowers may have already over-stretched themselves in order to get their mortgage. In this current climate it seems vitally important that these customers focus on prioritising their borrowings, which in turn could see a number of unsecured lenders facing increased bad debt.
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A wider focus
While Briault’s speech may have been delivered to a room full of building society executives, it is clear that he had the wider non-conforming lending community in mind and also those lenders who may be considering entering the more specialist markets.
The FSA seems to be suggesting that a number of lenders involved in the market have not taken full account of the risks of lending to non-conforming customers. There was also a suggestion that lenders are ignoring responsible lending in the chase for non-conforming business in order to achieve increased margins.
This is a sensitive area and there will always be some who will chase volume. But in the main, it is my belief that lenders in these markets are very aware of the risks involved; indeed the compliance teams in these lenders are often more sensitive to these risks than many of their counterparts on the high street. It is clearly a riskier proposition for lenders to offer non-conforming mortgages and one would hope that this level of risk is built into the proposition.
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There continues to be a glut of new lender entrants to the non-conforming market and this again appears to be a concern for the FSA. Briault suggests that some new entrants do not have the necessary knowledge to operate in this market as they are unaware of the specialist nature of the sector. Again, I am not so sure of this – most of the newer lenders have either entered with the backing of a large parent company or are funded by specialist lenders so they should be acutely aware of the sector and its risks.
Acknowledging the difference
The situation across the pond in the US non-conforming market has added a certain edge to proceedings this side of the Atlantic. The FSA is concerned about the arrears rate for non-conforming mortgages, with Briault pointing out that it is currently running at ‘20 times the rate of arrears on prime mortgages’.
However, and the FSA acknowledges this, the situation in the US is different to that in the UK. We benefit from a stable employment situation, loan-to-values are less aggressive in the UK and while there are large numbers of low-start variable rate mortgages which roll up interest in the US, this is not the case here.
The US situation is a warning though and I’m confident that the parents of UK non-conforming lenders are taking steps to ensure that it is not repeated in the UK. Of course, it is the FSA’s job to raise these possibilities and it would be a foolish lender indeed that did not take note of the lessons to be learnt from the US non-conforming sector.
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It is sometimes difficult to work out what the FSA hopes to achieve with some of its public comments. In this case, it is obvious that the regulator wants those players involved in the non-conforming market to look at their processes, and determine whether they are in any way over-exposed in certain areas. This is all part of the ‘Treating Customers Fairly’ initiative and speeches like this are intended to focus the thinking of all mortgage industry stakeholders.
If the speech was intended to put off new lender entrants into the non-conforming market though, then I doubt it will achieve this. Non-conforming is a core part of the overall UK market and very much here to stay. As long as the risks are weighed up and lenders understand the market and the risks involved, then we can expect more to enter the sector in the months and years ahead.
