By: Colin Snowdon is Chief Executive at Freedom Lending
The non-conforming mortgage market, which covers a wide spectrum of products and customer needs, is one of the sectors in which both traditional and new lenders are seeking growth over the coming months and years.
In particular, competition in the adverse market (on which I will focus this article) has become intense, with many lenders actively engaged in the near-prime sector and several pushing further down the credit curve into medium and heavy adverse lending.
One of the obvious reasons for this growth is that margins are wider in the non-conforming market than in the prime market. Another reason is that this is a sector which is expected to grow over the next few years. A recent Datamonitor report (June 2006) estimates there are approximately 9.1 million ‘non-standard’ people in the UK (Datamonitor defines ‘non-standard’ people as those who are systematically refused credit by mainstream lenders). The report estimates that the size of the non-standard sector will gradually increase year-on-year to 9.42 million by 2010. These statistics mean that 25 per cent of all UK adults of working age are deemed to be ‘non-standard’ or, put another way, one-in-four of the working population or 5.1 million households, are ‘non-standard’. This group represents a rich vein of business opportunity for mortgage lenders.
It is worth bearing in mind, however, that although personal sector debt in the UK is now more than £1 trillion, the amount of unmortgaged housing equity stands at around £2.6 trillion, which is the largest component of wealth in the UK. People are increasingly willing to tap into this source of low cost finance in order to restructure debts and overcome short-term financial difficulties.
Delivering our promises
Among the lenders active in the ‘adverse’ non-conforming mortgage market is Freedom Lending. Launched into the UK intermediary mortgage market in May 2004, the business has grown rapidly during the past couple of years and we have built an enviable reputation for delivering against our promises. In our first year, completions totalled £125 million, followed by £250 million in the second year. Year three is shaping up very nicely and the company is on target to complete over £800 million in the full year. Just as importantly, we have also consistently offered a first class service proposition to our customers.
Global investment bank, Merrill Lynch, was so impressed by Freedom Lending that it decided to make an offer for the business, which was accepted in July this year. Ownership by Merrill Lynch heralds the start of the next phase of Freedom Lending’s development and you are guaranteed to be hearing far more about us in the future.
I was recruited by Freedom Finance in 2002 to establish Freedom Lending. Prior to joining the Freedom Group, I had been responsible for launching The Mortgage Business (TMB) in 1989 and also established Verso in 1998. I am no newcomer, therefore, to the task of planning, building and launching new lending businesses.
In my opinion the key to our success has been recruiting an experienced and proven senior management team. Perhaps unsurprisingly, I decided to persuade my ex-Verso colleagues to travel a few miles further North to join the new business, which is based in Wilmslow, South Manchester.
Our launch in May 2004 focussed on ensuring systems and infrastructure were robust before we started processing large volumes of business. Brokers have long memories and if their initial experience of dealing with a lender is marred by poor service, slow response times and frustration for their clients, they will understandably be reluctant to come back again in the future, especially with so many other lenders vying for their business.
Getting back ‘On-Track’
Although Freedom Lending has positioned itself in the specialist prime market with a comprehensive range of products which includes self-cert, buy-to-let (BTL), let-to-buy and full status mortgages, the company also has a full range of adverse products for borrowers, whatever their credit status may be.
Freedom Lending launched its innovative ‘On-Track’ credit repair range last year, which rewards those borrowers who keep up-to-date with their mortgage payments, with regular rate reductions. The On-Track range covers a broad spectrum from light to heavy adverse – a total of 10 products catering for everything from missed mortgage payments to CCJ’s, Individual Voluntary Arrangements (IVAs) and bankruptcy. On-Track renders the need to remortgage to obtain a prime rate a thing of the past. Borrowers are immediately rewarded for making payments on time and, if they keep their payments up-to-date, will find themselves benefiting from a competitive prime rate as a matter of right.
All of Freedom Lending’s products, including our adverse range, have been carefully developed to address issues which most other lenders have left unanswered, such as restrictive income multiples, adverse products which do not reward borrowers for maintaining a good payment record, depersonalised underwriting, inadequate loan-to-values (LTVs), higher lending charges (HLCs) being imposed on prime mortgages, and interest rates linked to LIBOR, which few borrowers understand.
Affordability
One of the key features of our product range is the use of an affordability calculation. Rather than using traditional income multiples, we use an affordability calculation, which takes into consideration borrowers other financial commitments, as well as their salary. This means borrowers who do not have significant other debts can usually borrow more than the usual 3.5 plus one traditional income multiple will allow.
Our affordability calculation is very different to those used by many of our competitors, because it is fully transparent and easy to use. Unfortunately, there is not an industry standard when it comes to affordability calculations and most lenders have adopted subtly different approaches, which is confusing for both brokers and borrowers. We have not gone for a ‘black box’ approach in which it is impossible to understand how the calculation works, preferring instead an easy-to-understand and fully transparent formula. It is just as easy to work out as income multiples. Feedback from intermediaries has been excellent.
Self-certification has been a cornerstone of Freedom’s product offering across our entire range, including adverse, from the day we launched and this is a sector of the market I feel I know extremely well, having helped to pioneer self-cert both at TMB and Verso. Self-cert has been maligned in the recent past, but my experience has always been that, if self-cert is sold correctly and underwritten diligently, then there will be no problem with credit quality. Indeed, I know from experience that self-cert portfolios need present no greater risk than full status business.
Strengthening our
The acquisition of Freedom Lending by Merrill Lynch has strengthened our competitive advantage still further. We now have access to significant financial and management resources that we could only dream about a few months ago. Funding issues have been removed and we are now developing our product and service proposition to compete head on with the very best in the prime niche and adverse markets. Within just a few short weeks of our acquisition we were able to announce a number of significant enhancements and there are more to come – watch this space.
Freedom Lending has quickly become a recognised and proven competitor in the prime niche mortgage market and is now making significant inroads into the adverse mortgage market. Most importantly, we have placed the highest priority on ensuring intermediaries receive a consistently high quality and personal service – a priority which we intend to maintain at the top of our list. With a solid track record, the support of the mighty Merrill Lynch behind us and a management team which has been tested and proven in the market, the future looks very positive indeed for Freedom Lending.
