The specialist mortgage market is an exciting place to be at the moment. A vast range of new entrants have added a new intensity to the competition. After years of relatively sleepy existence, all lenders are having to up their game or face losing out.
Add to this several major breakthroughs, including the first instant offers, and you realise how rapidly the market is advancing, based on different approaches to technology. It is genuinely the start of a new era in specialist lending.
So how is this upheaval going to alter the shape of the market in the future? What will it look like in 12 or 24 months’ time?
Market growth
The market’s growth prospects are looking very good indeed. There are deep-rooted social trends that are creating more specialist borrowers. Changing employment patterns are having a significant impact, with an increase in the self-employed, short-term contracts, larger bonuses, employees with multiple jobs and other employment innovations. More people are earning enough to afford their mortgage, but are being rejected by mainstream lenders because they cannot prove it with payslips.
In addition, the rise in consumer debt means more borrowers have minor credit history blemishes, such as missed credit card payments. Again, this is boosting the specialist lending market, with the near-prime area showing particular expansion.
The technological ‘haves’
Over the last six months, I believe we have seen specialist lenders starting to head down two different paths. The first is the ‘high volume, advanced technology’ route. These are lenders who have embraced technology and, importantly, have the capital available to invest in it heavily.
As a result, they now have application and completion processes that can deal with high volumes quickly. The time that human underwriters need for a decision is reduced and their inconsistency is cut out. Automated processes based on sophisticated credit scoring techniques and automated valuation models that will offer a quick service to intermediaries are used instead.
These lenders aim to be competitive across the full range of specialist mortgages. Whether the borrower is near prime or heavy adverse, a buy-to-let, self-cert, house purchase or remortgage customer, the lender will have a low-priced range of basic and innovative mortgages – a ‘one-stop shop’. But they will particularly concentrate on the near-prime sector, where there is a large (and increasing) number of customers.
The technological ‘have nots’
Going down the other route will be lower volume lenders that are more heavily specialised in one particular area of the market (e.g. heavy adverse buy-to-let). They will effectively sweep up borrowers who fall just outside the edges of the product criteria offered by the larger lenders. As they have a larger degree of human underwriting, they will be able be more flexible, considering applications on a case-by-case basis.
However, because they are operating in a niche market, their rates will be higher, and turnaround times for applications will be slower. While they may offer a full range of products, they will only be competitive in their specific niche. These lenders will concentrate on the riskier areas of lending, where volumes will be low and margins comparatively high.
Feeling the squeeze
In the medium-term, either of these routes is viable. However, over time I believe the smaller, more specialised lenders will find themselves being squeezed by the larger, more technology driven outfits. Automated underwriting has already reached a highly sophisticated level with innovations such as high quality cascade systems that allow for greater flexibility. Credit scoring techniques will keep on developing.
This increasing flexibility will allow larger lenders to analyse where they are ‘missing’ borrowers and adapt accordingly. In addition, they will be able to invest far greater sums in their systems, ensuring they are at the cutting edge of innovation. The smaller, niche lenders will always have some business, but are bound to find themselves squeezed.
The sorting process is already occurring. Companies have invested in high quality technological systems, while others are lagging behind, as they do not have the capital or the know-how to put systems in place. There’s often an initial scepticism over new technology. But in the end, detractors are always proved wrong.
The technological ‘have-nots’ are getting unconsciously sorted into the low volume, niche route.
The next 12 months promises to be a vital period for specialist lenders. The market is showing healthy growth. But with all the new entrants, not all lenders can be successful, meaning some won’t get anywhere near their ambitious lending targets. The future – as it always has done – lies with lenders that are bold enough to innovate in a way that makes a real difference for intermediaries.
