Sales of non-conforming mortgages are set to rocket over the next few years but, with more and more new products being launched, the sales process may be proving too complex for smaller brokers to offer best advice.
Experts are now urging advisers to double-check every single sale, amid fears that some may be inadvertently mis-selling the loans.
Non-conforming mortgages – those aimed at borrowers with a poor or damaged credit history – were earmarked by the Financial Services Authority (FSA) as cause for concern in September 2005. The watchdog revealed that in three out of four non-conforming sales, not enough customer information was obtained.
The FSA visited 31 small non-conforming brokers and looked in detail at 210 case files. Although it blamed poor record-keeping rather than the sales process itself, the FSA committed itself to carrying out a further review in the early part of 2006. It added it would also be working with advisers to identify any areas of concern.
Mis-selling worry
The growing popularity of non-conforming loans is one of the reasons the regulator is so worried, says Matt Grayson, head of public relations at specialist lender BM Solutions.
He claims the growing number of bankrupts, those taking out Insolvency Voluntary Arrangements (IVAs) and people defaulting on loans and credit card payments has encouraged the entry of mainstream lenders, including Accord, into the non-conforming mortgage market.
There is also an acceptance by other lenders, such as Abbey, to take onboard clients with a riskier credit profile.
But within the non-conforming mortgage market lies a complexity that may put smaller brokers at risk of mis-selling the loans.
A source, who did not want to be named, says: “There is a fear that some people are being sold the heavier classification of the product when they should be sold a lighter version. This is an area that worries me, and I know that advisers need to do something about it.”
The source says the confusion arose because different lenders had different classifications of non-conforming. These range from light – often called near-prime – through medium adverse and heavy non-conforming.
The source claims: “Some lenders might consider a borrower who had missed a few loan payments as qualifying for a light non-conforming loan, while another might consider someone who had just paid off a County Court Judgement (CCJ) as qualifying for a light product.”
The source adds that this ambiguity extends to qualifications for medium and heavy products as well, with some recently-discharged bankrupts qualifying for the medium versions of the loans.
David Copland, marketing director of non-conforming packager Pink Home Loans, agrees that these differing qualifying criteria can compromise the advice given by smaller brokers.
He says: “Smaller brokers tend to go with one or two non-conforming lenders. They will put their client’s details into the lender’s online system. The lender will do a credit check and offer the client a choice of suitable non-conforming products.”
This process is known as cascading and matches clients to that particular lender’s most suitable product.
Copland says some lender’s non-conforming criteria might not be suitable for the client. “Going to one lender can often mean you don’t get the choice,” he claims. “Brokers will need to research the market using a mortgage sourcing system. But non-conforming products are not that mainstream yet, so most smaller advisers will only sell a couple a month at the most. So they are not going to spend a lot of money on a sourcing system.”
Copland claims the complexity of the sales process doesn’t take account of more ‘human’ issues. He says: “Quite often a client will not really be that sure of their own credit history.
“So you think you have got a client who qualifies for a heavy adverse non-conforming loan, but it turns out after a credit check they are better off with a medium adverse one, and the lender you are using might not have the best rates for a medium-risk non-conforming client.”
“Of course it happens the other way around – someone has a far worse credit rating. The issue really is that when you do get a client with a different rating you have to go back and do your research,” he adds.
A tricky business?
James Cotton, mortgage specialist at London & Country (L&C), says that with as many as five categories of non-conforming, and very differing rates, things can get tricky.
“You get a choice of two medium non-conforming products from the same lender and they both look like a good deal, but the thing is you still have to look around.”L&C has invested in a customised sourcing system. But as Cotton says, not all intermediaries can do that.
Cotton believes that with the entry of more mainstream lenders into non-conforming, things could get easier for smaller brokers. “Abbey and Accord are both good mainstream lenders offering mortgages to those who fall into the near-prime category,” he says. “I expect more lenders may follow.”
But there is also another issue, that of the fees that non-conforming brokers can charge. Cotton explains: “The heavier the mortgage the bigger the fee. You only have to search on Google and you can see that some non-conforming intermediaries are charging 2 to 2.5 per cent of the loan. That could easily work out at a £3,000.”
Cotton says he is not implying that some broker are deliberately over-selling but that there is temptation to do so. “There is always a very small amount of brokers who will go for the product that attracts the largest fee. That’s not to say the product is not appropriate, just that there could be a more appropriate one for the client,” he explains.
The sale of a non-conforming mortgage is lengthier, adds Copland. “This makes it easier just to go with your first choice.”
Even lenders like BM Solutions, which has just launched a range of credit repair, or near-prime, products admits that there is temptation to over-sell non-conforming.
Grayson says: “I think there are a handful of cases in the sector where non-conforming mortgages are being mis-sold, but it’s not what I would call a material level of business.”
Lenders can only do so much to make sure clients get the most suitable non-conforming product, Grayson claims. “We fully credit check any customer who applies to us and we use credit experts, such as Equifax, so we can get a full handle on a potential client’s outstanding debt.”
BM Solution’s quality and assurance team also review sales on a regular basis. Grayson says: “There are cases where an adviser may have oversold but it doesn’t happen often.”
Linda Will, managing director of Accord Mortgages says it also double checks all non-conforming sales.
She says: “We cascade all applications and assume nothing. We don’t ask the adviser. What we do is run everything through our system, which will, among everything else, check credit ratings.” Will admits: “There are often cases where things end up being different, for example, a customer may fit a different profile from the one they were presumed to be.”
Will also agrees that the non-conforming process is lengthy. But argues that the underwriting process is designed to make sure that these riskier clients are not placing themselves at further risk of default by entering into a mortgage agreement.
She doesn’t believe brokers are deliberately mis-selling and that at the end of the day, someone sold a heavy non-conforming loan will be able to move their mortgage to a lighter one with better terms. So if someone is over or mis-sold a non-conforming loan, the damage is minimal.
She points to Accord’s two-year deal, which allows non-conforming borrowers to switch, without penalty, at the end of the fixed period.
“We are offering advisers a fee if they switch the customer into the prime offering, but the customer pays nothing and they don’t have to worry about arranging another mortgage.”
Will explains that current heavy non-conforming customers are not at risk. “We make sure all our non-conforming customers are not at risk. Charges are higher with these mortgages but when someone is sold a heavy non-conforming loan they will be expected to put down a deposit of at least 25 per cent,” she says. “In our experience, and I’m sure other lenders will agree, someone who has defaulted on their loans once is more likely to get into trouble again.”
“So by making them pay a large deposit they are taking some responsibility,” she adds.
The fact lenders are confident is evident by the new entrants, says Will. “There only used to be about six non-conforming lenders in the market. Now you are getting more mainstream ones, like ourselves, with a prime lending background.”
Grayson says BM Solutions is committed to making sure all clients are given the lightest possible non-conforming product.“Non-conforming mortgages are about credit repair and mortgage intermediaries can play a big part in helping get people back to a near-as-possible prime mortgage product,” he says.
“We pay brokers a procuration fee to make sure they transfer BM mortgage clients to a near-prime mortgage when they are coming to the end of a non-conforming deal. That way the client pays less both in terms of a fee and in terms of the interest, because near-prime is cheaper than a full non-conforming mortgage.”
Working together
Grayson believes lenders and intermediaries have to work together more if the market is to grow and do so without a whiff of mis-selling.
He says: “There is a lot of information out there, so there is no need to offer someone an unsuitable product, but it does happen. Lenders have good systems that enable us to cascade clients down to an appropriate product.”
BM believes that sales of all non-conforming products will increase this year. Grayson says: “There is no correlation between the growth of non-conforming and increased bankruptcies. There are other factors that are meaning people no longer fit into the conformist lending mould.”
This makes it more important for brokers to be aware of the newer non-conforming client profile.
Grayson explains: “We are seeing people who are in good jobs, with a decent wage who are falling into the heavy non-conforming category. “For example we’ve had a well-known football league executive who got into dispute and found himself with several CCJs.”
Cotton says an increase in divorce and redundancies needs to be watched by brokers too. “Clients are getting more diverse and they won’t always fit the mould. More and more borrowers will be needing non-conforming mortgages.”
Will adds: “There have been issues about whether not selling a mortgage to someone with an impaired credit rating would fall into the issue of ‘Treating Customers Fairly’ (TCF). But if someone can prove that they can pay that mortgage there is no reason why they should not be able to buy their own property. People have to have somewhere to live.”
Bernard Clarke, communications manager at the Council of Mortgage Lenders, was not able to give specific data on non-conforming mortgages.
He says: “Lenders trust brokers to sell these mortgages sensibly and the on the whole they are doing so.”
Samantha Downes is a freelance journalist
