We often talk about the speed with which the mortgage market changes but few would have predicted the rapid developments that have engulfed us in the last few months.
It is certainly true to say that a focus on the specialist lending sector would have contained a rather different appraisal a few months ago than it does now. Back then, the market’s ability to expand and handle more lenders offering more products seemed unstoppable.
Now, we find ourselves with a very different story to tell, in which the number of lenders will stagnate at best and more than likely fall as the full effects of the situation begin to hit home.
Clearly, the impact of the US non-conforming crisis on the UK market has been considerable and for some lenders and providers, catastrophic. Those who had initially hoped the UK might pass unscathed from the growing problems State-side have been proven to be hopeless optimists as the ‘credit crunch’ has proved all-encompassing in terms of its impact.
With many UK lenders reliant on their funding from US investment banks heavily exposed to the non-conforming market across the pond, it seemed inevitable that the old adage about the US sneezing and the rest of the world catching a cold was to play itself out.
This has without doubt been the case. The UK specialist market is currently in a state of flux with each new day bringing developments which are fundamentally changing the overall shape of the mortgage industry. At this present time it is particularly unwise to go into ‘Mystic Meg’ mode and predict when the specialist lending sector will return to a state of normality.
In fact, it will be some time before the situation normalises; certainly lenders are having to reassess their previous methods of lending and the sectors they operate within. Some lenders have already paid for the market conditions with a number of operations already slimming down as parents look to reduce costs and their own exposure.
Flight to quality
There is one phrase which continues to be used to describe the actions being taken by lenders in the current market and that is a ‘flight to quality’. Those lenders who in the last few years pushed themselves further and further around the risk curve are now having to retrace their steps at a rate of knots. There has been a mis-use of the words ‘innovative lending’ when what we have in fact seen is a reduction in criteria and price.
In the past few years as new entrants have entered the market and the volumes of business being completed in the mortgage market have risen, there was almost an assumption that all lending was good lending.
Getting the business on the books seemed the be all and end all of some lender’s ambition without looking at the potential risk they were taking on or whether that business was actually profitable. We read much about ‘responsible lending’ but whether this was taking in place in practice remains to be seen.
The credit crunch has perhaps been the reality check that the specialist market, and in particular those lenders who could not see the wood for the trees, was in need of. Only now with the funding pool dry are we seeing the acceptance that some individuals represent too great a risk and should not be lent too.
While we can accept that people who have previously fallen into trouble should be able to get a mortgage in the future, we should not blindly believe that those who have large amounts of debt and a history of defaulting should automatically be able to acquire even larger amounts of debt. This is a false economy for lenders and short-term gain has now resulted in plenty of long-term pain.
Flight to sanity?
It is not just those lenders who securitise that must look again at the fundamentals of their lending policies. Some commentators have suggested that this period could be ‘rich pickings’ for those balance sheet lenders if they move into the space recently vacated by the specialists. This is unlikely to happen given that the risks in operating, for example, in the heavy adverse sectors still remains.
Fundamentally, lenders have to look at risk and their criteria. The ‘flight to quality’ or perhaps we should say ‘flight to sanity’ means that lenders are looking for borrowers who represent lower risk which means criteria changes including lower maximum loan-to-values (LTVs) and, one would hope, a more robust review of the potential borrower’s ability to pay, and keep on paying, the mortgage.
Which is not to say the situation is always going to be as it is now. Eventually, although again it is difficult to predict when, the market will become less turbulent and return to a more ‘normal’ situation. Ultimately though, it will be a different normality to the mortgage market of the first half of 2007. Intermediaries in particular will be earning their corn, as always, by explaining and leading their clients through the product offerings and the reasons why they may find it much more difficult to obtain a mortgage if they are deemed to be ‘specialist’ themselves.
The whole specialist lending sector, and how we define the areas it comprises, is also changing. It is widely held that the so-called niche markets go to make up ‘specialist lending’ which would include non-conforming, self-cert, buy-to-let, etc but perhaps we should also be considering the commercial market, secured lending or bridging loans as well.
There is an argument to suggest that a market such as buy-to-let should not be considered specialist as it has become more of a mainstream product with rates closer to those of residential mortgages over the last few years. The fact that buy-to-let now accounts for over 10 per cent of all mortgage balances also shows the mainstream nature of this sector.
Specialist could indeed mean any sector which is outside the mainstream and this means we have a particularly wide and diverse array of niche areas to look at. The ‘credit crunch’ will undoubtedly impact on some lender’s ability to look at new specialist areas and provide criteria and affordability led products which deliver the key ingredients for borrowers and, rather importantly, are profitable for lenders. Sustainability must be the watchword for all lenders looking to operate in this particular sphere and branch out into new areas.
Showing commitment
In this current climate, intermediaries want to know that lenders operating in these specialist sectors are not just there for a quick buck and, when the pressure comes on as it clearly is at the moment, they are not going to quickly vacate their ground. Certainty, in this regard, is essential and we believe that it is important not to try to be all things to all men. If a lender has a specific specialist focus then it should aim to be the best that it can be in those markets.
Those lenders who have over-stretched themselves in the quest for quick ‘big numbers’ are the ones who are right now beating a hasty retreat. Experience counts for a great deal and intermediaries want to work with lender partners who provide certainty of offering, certainty of criteria and certainty of service.
The past 10 years have without doubt seen the almost unabated rise of specialist lending. This period has resulted in many believing that the market could continue to grow forever with new lenders entering the sector and moving continually around the risk curve with no consequences for both their borrowers and their own operation.
If the credit crunch has proved anything it is that this state of affairs was not sustainable. Lenders are being forced to look in more depth at the way they lend and who they lend to, and while in the short-term the consequences are clearly being felt by those who work within the mortgage industry, perhaps at the end of this period we will see a much more sustainable lending community which will be in a far better position to deliver real value to all stakeholders.
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