The past 10 years have seen the emergence and rapid growth of the UK’s non-conforming mortgage market.
Specialist lending accounted for just under a quarter of total lending in 2006 with the fastest growing sector – non-conforming mortgage business – valued at approximately £28.8 billion, according to the Council of Mortgage Lenders.
Rising house prices, growing levels of consumer debt and bankruptcy have increased the percentage of borrowers that do not qualify for mainstream lending. In addition, there are a growing number of self-employed people with no fixed income who do not meet traditional lending requirements.
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A decade ago, borrowers with an adverse credit rating or unconventional financial circumstances were considered higher risk and only a handful of mortgages were available. However, as the market has evolved to cater for changing consumer needs, the choices are no longer so bleak and products are being developed to suit all situations.
New entrants
The potential of the UK non-conforming sector has caused a substantial number of new lenders to enter the marketplace in the last couple of years with several more new entrants expected this year. These companies have seen strong business growth and emerged to become top UK non conforming mortgage lenders. With the equivalent US market currently experiencing problems, American firms are capitalising on UK buoyancy. For example, last year Morgan Stanley acquired Advantage as a platform to market and GE Money recently took a 20 per cent stake in Solent Mortgage Services.
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Where the UK market is stable, the US non-conforming market has fallen into crisis due to over-supply of housing and stagnating prices as well as relaxed lending criteria, margin compression and rising interest rates. Unable to afford the increasing monthly repayments, borrowers have defaulted on their loans and as a result at least 20 lenders have had to stop trading already this year. This has led to commentators questioning whether the trend is set to repeat in the UK. It should act as a warning to UK lenders not to expand their business at the expense of responsible lending in a climate of rising interest rates.
Technological advancement
The continued development of the non conforming industry in the UK will be assisted by technological advancement. Technology will enable lenders to assess what borrowers can afford using more sophisticated methods. Automated valuation models and cascade systems are helping lenders to offer suitable mortgages to the consumer at pace.
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Despite their benefits the use of cascade systems is a contentious issue as the suggested product may not be the best available in the marketplace where an application has cascaded. The intermediary must check the proposed product solution against the marketplace to ensure the client is receiving the most suitable product. In addition, not all systems give the option for borrowers to be cascaded up and down the product spectrum, although more lender systems are including this functionality. Ultimately, responsibility for advice remains with the broker who has a duty to re-check the cascade product against other suitable mortgages.
TCF
The Financial Services Authority’s (FSA) ‘Treating Customers Fairly’ (TCF) initiative is therefore an essential regulator for the non-conforming market. Brokers must ensure their advice and the products they recommend is suitable and takes account of the borrowers’ individual circumstances. To date, only 22 per cent of small brokers have established compliance systems in line with the TCF initiative, and the FSA has now extended the deadline to December 2008.
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It has been questioned whether packagers still have a role to play in the evolving non-conforming market. Although a number of advisers prefer to go directly to the lender, packagers still add value to the market due to the complexity of the lending criteria. They often have expertise in non-conforming business as well as on-site underwriters and branded lending, which means they are able to offer a specialist service and a probable solution.
Growth in the non-conforming mortgage market will continue to be fuelled by rising rates and increasing levels of consumer debt and credit problems over the next few years. Technology will aid the evolution of this sector and the development of more sophisticated online systems from both lenders and packagers can only help the industry in terms of correct and appropriate product selection. Ultimately, responsibility sits with the adviser to ensure the customer is treated fairly and is offered the most sound advice and appropriate product.
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