As the new marketing director at Mortgages plc, one of the first things I wanted to do was get an update on the state of the non-conforming market. I’ve spent most of my life working for mainstream lenders and therefore wanted to immerse myself in the non-conforming sector and understand the differences between this specialised market and its prime counterpart.
Those nice people at Datamonitor must have read my mind, because within a couple of weeks of joining Mortgages plc it published its latest analysis of the non-conforming mortgage market in the UK. It certainly makes for interesting reading and gives a good overview of the state of the non-conforming nation.
However, as with any research into the non-conforming market, particularly research which reports lending volumes and market share, the figures quoted cannot be taken as hard fact in the same way that Council of Mortgage Lenders’ (CML) market data can. This is not a slur on Datamonitor’s methodology; it simply reflects the fact that, at the moment, there is no systematic collection of data from non-conforming lenders, in the same way that the CML collects data for the prime market. However, the good news is that the CML is attempting to resolve this. Its Adverse Working Group is in discussion with lenders to create a set of standard definitions for this sector which will make the collection and correlation of reliable data possible.
Market trends
So, what does the UK’s non-conforming market look like? Well, according to Datamonitor approximately seven million people of working age in the UK would have been refused credit by mainstream lenders in 2006 and about 4.2 million people would have been classified as non-conforming individuals. These figures represent an increase of 132,000 in the size of the non-conforming market, following several years of decline. This means that 11.6 per cent of the UK’s working population is deemed to be non-conforming. Rising interest rates and difficult financial circumstances are clearly starting to have an effect.
Interestingly, although the size of the non-conforming population has been declining slightly at the rate of minus 1.1 per cent since 2002, the non-conforming mortgage market has grown rapidly, with a 28 per cent increase in gross advances over the previous year. Datamonitor estimates that gross advances reached £24.6 billion in 2006, although others believe the actual size of the market is closer to £30 billion or about 8 per cent of all UK mortgage lending. It is estimated that the non-conforming market is reasonably evenly divided between remortgaging and house purchase. The level of remortgaging has grown steadily during recent years and is more prevalent in the medium and heavy adverse sectors, where borrowers are believed to be consolidating debts to reduce outgoings.
Expectations
Datamonitor’s expectation is that the non-conforming market will continue to grow at a faster rate than the prime market, reaching £31.5 billion by 2011. This represents an annual growth rate of 4.7 per cent, compared to 2.6 per cent in the prime market. The greatest growth has been in the near-prime and light adverse sectors, which are believed to account for about 70 per cent of all new business. Not only have these sectors grown rapidly as more individuals have developed adverse credit records, but they are also the sectors which are most attractive to new lenders entering the market, as well as prime lenders who have decided to extend their lending activities.
For many who have been classified as light or near-prime borrowers, their credit problems are usually short-lived and they are able return to mainstream products in due course. The same does not hold true for the medium and heavy adverse sectors, where borrowers tend to have more significant debt problems. Packagers dominate distribution in the medium and heavy adverse sectors, because they can add real value to brokers by helping them place these more complex applications.
Fierce competition
Although the non-conforming market is one of the fastest growing sectors, it is also one in which some of the fiercest competition for market share is taking place. This scramble for market share is having the effect of driving down pricing and encouraging some lenders to make their lending criteria more accommodating, which, it is argued, is starting to run contrary to the principle of risk-based pricing. The danger, of course, is that as rising rates put borrowers’ finances under further strain, lenders who have relaxed their lending criteria will be among the first to feel the effect of increasing levels of defaults and arrears.
As the market continues to become more competitive, it is almost inevitable that greater emphasis will be put on technology to drive down cost, improve efficiencies and deliver a faster and more reliable service to brokers, packagers and clients. Packagers have already demonstrated their ability to survive and thrive, but there is nonetheless an expectation that there will be a degree of consolidation within the packaging community.
It’s ironic that the non-conforming sector is one which most of us hope will decline for obvious reasons, but is nevertheless the sector which represents the biggest growth opportunity for advisers and lenders. In a market which is showing early signs of tightening, this is clearly a sector which few brokers can afford to ignore.
**ends**
