Cast your mind back to February 2004. In that month, the BBC’s Money Programme screened its first focus on the self-certification mortgage market, and to say that the feel of the programme was on the negative side might be a slight underestimation.
As a direct result of the show, the sector has suffered a lot of bad publicity, playing right into the hands of those who had derided self-cert from its beginnings, often using the US label “liar loans” to draw further unwelcome parallels with the recent collapse of the non-conforming market across the pond.
These same critics have also labelled other innovations in
the sector, including non-conforming and buy-to-let, as risky, ‘flash in the pan’ lending. But, despite this criticism they have all proven their resilience.
Self-cert in particular has been around for nearly 20 years and, as confirmed by the recent report from Datamonitor (UK Self-certification Mortgages 2007), the sector grew at an impressive average annual rate of 17.8 per cent between 2002 and 2006. Last year alone, it produced around £17.3 billion gross lending – an impressive figure by any standards, and one that outpaces the income-verified mortgage lending during the same period.
But a recent survey by specialist lender Mortgage Express has highlighted confusion, even ignorance, amongst consumers, with 71 per cent not understanding how self-cert works and 47 per cent not even knowing it exists. So there is undoubtedly room for education.
Why has it grown?
The sector continues to be driven, even dominated, by the self-employed market. In fact in 2006 the self-employed market accounted for a huge 71 per cent of gross self-cert mortgage lending. When you consider that at the end of last year around 13 per cent of the UK’s workforce was self-employed, accounting for around 3.8 million adults of working age, that’s a substantial market segment.
Self-cert works well for this group whereas the methods employed by mainstream lenders in the past simply hadn’t. Providing three years worth of audited accounts often just wasn’t practical, appropriate or even possible for the vast majority of self-employed applicants. Self-cert helped overcome this but goes further by enfranchising a wider range of borrowers who cannot, for a variety of reasons, verify their income.
Specialist lenders were more willing and able to understand this situation and pioneered new methodology that included making lending decisions by using complementary tools, such as credit searches and mortgage references, when assessing self-cert applications.
But the self-cert market isn’t solely about the self-employed. According to Datamonitor, fixed-rate contract workers accounted for 23 per cent of all self-cert mortgages in 2006. The sector is growing annually thanks to ongoing demographic and macro-economic changes in the UK that has given rise to increasing numbers of seasonal workers, people on low salaries but who enjoy large and irregular bonuses, and consumers who derive income from non-conventional sources, such as investment properties overseas or buy-to-let investments, all of which provide them with a good income but which can be difficult to prove.
But that still leaves a percentage of the self-cert population unaccounted for, so who makes up this missing part of the mix? Looking at the market, it can be seen that some specialist lenders are offering self-cert facilities to PAYE employees who satisfy certain conditions. But this is a more controversial area and one that has caused polarisation amongst lenders, drawing additional unwelcome negative attention as a result.
Catering for self-cert
This growing market continues to be well supplied thanks to the rise of the specialist lenders whose appetite and approach to risk lends itself well to the self-cert opportunity. According to Datamonitor, twenty-two of the thirty-eight lenders currently operating in the self-cert mortgage sector come under the ‘specialist’ category. This has led to a substantial amount of product proliferation and innovation including an increase in allowable loan-to-value (LTV) ratios, and the widespread introduction of contemporary affordability calculators.
The intermediary sector, covering packagers, brokers and IFAs, has also embraced self-cert with both arms. In 2006 alone, according to Datamonitor, the intermediary channel generated £15.6 billion in new lending in the self-cert sector out of a total of £17.3 billion. It is also a well-known fact that the majority of intermediaries are convinced that the self-cert mortgage market will continue to grow.
The mortgage market as a whole has clearly warmed to self-cert. Over the last ten years, high street lenders have taken an increasingly relaxed position in terms of offering the product. And while it hasn’t entirely permeated the mainstream, more and more well-known names are involved in self-cert, either under their own brands or through specialist brands that they may have acquired or developed in-house.
Development
Back in 2004, following allegations that consumers had been encouraged to commit fraud when making self-cert applications, the Financial Services Authority (FSA) published a report that said that self-certification lending accounted for a small proportion of overall mortgage balances – about 6 per cent – and that the number of customers who encounter difficulties with repayments were not significantly higher than those with standard mortgages.
However, this didn’t keep the sector off the industry regulator’s radar, and the FSA is reviewing the self-cert marketplace on an ongoing basis. It provides a great deal of information on its website in terms of its research into the self-cert market and recommended best practice, but it doesn’t go so far as to categorically endorse the sector. It is clear that the FSA recognises that this is an area of higher risk lending so it is under the spotlight in the same way as non-conforming. It is also clear that an area of interest for the FSA is the more controversial one of self-cert for PAYE individuals.
There is also concern in the market about increasingly tough economic conditions following recent increases in bank base rates. When linked with continuing high personal levels of indebtedness among consumers – reportedly £1.3 trillion in the UK alone – sharp increases in personal insolvencies involving IVAs and bankruptcy, and nationwide company business failures, there may be some justification for this.
To date there is strong anecdotal evidence, supported by the statement made by the FSA above, that the arrears performance among the self-cert population is no worse, and possibly even slightly better, than that among status borrowers.
Lenders and intermediaries are also more aware and willing to adapt to changes in the regulatory and economic landscape but there’s never any room for complacency – we only have to look at the US situation to see what happens when you take your eye off the ball.
To guard against surprises lenders should regularly stress test their self-cert lending portfolios and product offerings against a range of possible future scenarios, such as increased national unemployment or further increases to the base rate. Depending on the outcomes from these models they should react quickly to adjust lending criteria and product design accordingly. Lenders would also be wise to avoid risk layering on what are potentially higher-risk products like self-cert. Examples of risk layering include ultra-high LTVs and overly generous affordability parameters.
Lenders and brokers should also have good management information reporting on the performance of their portfolios. It is similarly important to maintain good record keeping to show why a particular product was offered to a client, and to have in place transparent processes that are fully compliant. And, of course, everyone involved in the process should adhere to the principles of ‘Treating Customers Fairly’ and responsible lending.
So what’s next?
It has to be said that for self-cert the future is bright. The doom mongers are doubtlessly frustrated by the success, resilience and continuing sturdiness of the sector. But don’t take my word for it – let Datamonitor do the talking. The report already referenced happily states that, as consumers’ work lives continue to evolve and become less conforming, self-cert mortgage gross lending will grow at an annual average rate of 8.5 per cent from 2007 to 2011 to reach £27.3 billion in 2011. These are figures really not to be sniffed at.
Martin Gilsenan is sales director at Money Partners Touch
