Like the era of the shellsuit, the mullet and the handlebar moustache, fashions always change and fads come and go. The current flavour of the month in the mortgage market seems to be lenders introducing non-conforming ranges. Being dedicated followers of fashion, many banks and building societies have chosen to follow this trend and it seems there are few who have not thrown, or at least been linked with throwing, their hats into the proverbial adverse ring. So what makes these kids too cool for the non-conforming school? Mortgage Introducer turned off its ipod, stopped fiddling with its Blackberry, and found out why.
Burgeoning marketplace
For those choosing to enter the non-conforming market, the current state of our finances points to a steady increase in the number of people who will require adverse products in the future. Spiralling consumer debt, with estimates of around £1.1trillion being owed by UK citizens, is fuelling record numbers of insolvencies and repossessions pointing to a burgeoning marketplace.
Tony Jones, managing director at Pink Home Loans, says: “It is currently undoubtedly a strong market and while estimates of its size differ widely, it is usually around the £60-70bn mark so there are some healthy margins out there.”
But with only so much business to go around and with so many big players ploughing into the non-conforming market, is there a danger that there won’t be enough business to satisfy everyone?
UCB Home Loans, Nationwide’s specialist self-cert lender, is one of the players who hasn’t dipped its toe in yet. Vanessa Watson, PR officer at UCB, believes it is becoming more difficult to turn a profit in the current market and many lenders are looking to non-conforming as a remedy.
She says: “The mortgage market in general is currently very crowded and with all the new lenders, there’s only so much business to go around. New entrants into the self-cert market – our core market – show it’s not just non-conforming being targeted and the competition is generic across the entire range. It’s a lot harder to do business and you have to look at providing a range which covers as much as possible.”
However, if everybody follows the same philosophy, won’t the same problem occur and the margins currently on offer in the non-conforming market be ground down to nothing?
Jones thinks so. “There are a lot of players in the non-conforming sector and with the increasing supply lenders have to price their products very competitively, which will erode margins.”
Adverse profitability?
Alliance and Leicester (A&L) is one of the lenders who recently announced it is hoping to reap some of these profits by offering non-conforming products. However, Mehrdad Yousefi, head of intermediary mortgages at A&L, believes it is too early to make a realistic judgement on whether competition will have an adverse effect on adverse profitability. He says: “While competition is excellent for the broker and the customer, as far as providers are concerned, in due course, there may be a reduction in margins but that’s the function of supply and demand in any market.
“Going forward, providers will see more pressure on margins but it’s too early to judge potential profits in the sector as previously there have only been 15-20 lenders. Now with the likes of A&L in the market, it will be another 12 months before we can make any serious judgement on the issue.”
Therefore, have the risks associated with entering the non-conforming market put off those currently not involved?
Watson believes risk does play a factor. She explains: “Non-conforming is a different kettle of fish and you would need all the different background services and processes in place before you could consider offering it. We have decided to concentrate on having a competitive range in our core markets.”
Brand association
Joe Wiggins, media relations executive at Abbey, explains it is all about what is right for the brand. “It is something we haven’t been involved in since we sold First National three or four years ago and we feel the Abbey brand is not associated with the non-conforming market,” he says. “We are well known in the mainstream market and we are focussing on these areas and adding to them.”
If these lenders, however, decide to change their minds in the near future and open up their portfolios to non-conforming business, there seems to be a common consensus that they might be too late.
Jones says: “It is up to the individual lenders to judge whether the risk involved in entering the market is worth it, but it may take a few years to see returns. There is good money to be made now but if you don’t make a move soon, you will miss out.”
Simon Biddle, head of marketing and communications at Infinity Mortgages, agrees: “For those who don’t have their act sorted now, in terms of established procedures and services, they will have probably missed the boat. It’s two feet from the harbour wall already and, even if they decided to go in today, it would take at least six months to get everything organised so by then, the ship would have sailed.”
