Lenders and brokers alike received bad press following the Financial Services Authority’s (FSA) latest non-conforming review, but the media reaction doesn’t tell the whole story: non-conforming provides a vital service to a wide cross-section of people, opening up home ownership to thousands of families who would otherwise be unable to raise a mortgage.
The FSA’s report, published 4 July, disappointingly revealed there had been no improvement in brokers’ practices since its previous investigation of the non-conforming market in 2005. The review drew attention to weaknesses in certain broker and lender practices. In a third of cases, the broker’s assessment of customers’ ability to afford the mortgage was deemed inadequate, and consideration of the consumer’s suitability, needs and circumstances fell short in half of the files. On the lender side, criticisms were levelled at policies that were deficient in responsible lending terms and where checks and monitoring were deemed inadequate.
Not exclusive
This is a short report and, frustratingly, it lacks detail. It moves very quickly from a brief, unquantified list of weaknesses through to a list of good and poor practice and illustrations of two firms. In some senses it is little more than a simple cross-check with a firm’s own practices. What is very clear is that these findings – based on a sample of players – must not be interpreted as suggesting the non-conforming market as a whole is broken and needs fixing.
Many of these weaknesses are not, as some people have concluded, exclusive to non-conforming. They also occur in prime lending. Moreover, it did highlight ‘good practice’ in the sector – there was no evidence of non-conforming mortgages being sold incorrectly to prime customers. Yet, when it came to areas for improvement, the review failed to acknowledge the almost inevitable complexity of non-conforming cases.
A complex nature
The sector, by its very nature, deals with customers whose credit histories are not straightforward and whose circumstances vary considerably. There are greater risks attached to such lending and higher rates to offset them. The decision process reflects this complex nature.
Given the diversity of non-conforming, it is hard to define ‘good practice’ in simple terms – one size definitely does not fit all, and a changing market and technological enhancements may make today’s good practice obsolete tomorrow. The strength of the UK mortgage industry is its flexibility and dynamism, and any FSA ‘guidance’ about good practice could start to look like a straitjacket. At the same time, we should not ignore that some of the good practice identified referred to proper records and continuous monitoring – basic good business practice.
Non-conforming has come a very long way since it emerged in 1995, and continues to evolve and make large strides. For one thing, the first non-conforming mortgages were mainly for heavy adverse customers. Now there is a broad spectrum of products to meet different borrowers’ circumstances, from near-prime to medium and heavy adverse. What’s more, in terms of service, non-conforming borrowers are no longer second-class customers. There is mounting competition as the number of lenders in the sector grows, and the standards of professionalism are high. This has led to customer benefits such as competitive rates and technological innovations. The fact is, lenders who fail to keep up with these advancements will find life in the market difficult.
Demand in the non-conforming market is likely to grow dramatically, as consumer debt spirals to record levels and bankruptcies and insolvencies rise further. There are also many prospective clients who are reliable borrowers but have experienced credit difficulties in the past.
Concern
The Intermediary Mortgage Lenders Association (IMLA) is concerned this latest report could undermine the sector, at the very point when it faces pressure from the problems in the US non-conforming market – and, despite the clear differences, the continued discussion about possible contagion in the UK.
The lenders’ cause wasn’t helped by the fact the FSA’s original press release failed to specify that the five firms it had taken enforcement action against were brokers. This triggered unhelpful headlines and forced the FSA to clarify its message.
IMLA is actively engaged in joint work with both the Council of Mortgage Lenders and the Association of Mortgage Intermediaries on different aspects of the non-conforming market. IMLA and its members are committed to addressing any weaknesses that may exist and ensuring customers receive the best service and advice.
While IMLA unequivocally supports initiatives to raise standards in all parts of the industry, we would warn against undue red tape that detracts from the market’s flexibility and ability to evolve and meet customer needs. Above all, without denying that poor practice does exist in isolated cases, we must not lose sight of the fact that the non-conforming industry, as a whole, works well and continues to bring property within reach of many people across the UK who would otherwise find it difficult to access the market.
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