John Prust is director of sales & marketing, Lehman Brothers’ mortgage businesses and Director of London Mortgage Company
2006 has seen many developments in the non-conforming sector. From new entrants to the market, to new technology, it has been a year of change. Yet one of the most dynamic areas has been the significant developments in underwriting.
Indeed, across the mortgage sector underwriting changes have attracted considerable media attention, focusing on topics such as higher income multiples, longer-term mortgages, affordability-based lending and a change in the assessment of CCJs. It has been a busy year.
A number of high street lenders are now willing to offer considerably higher income multiples in an effort to get more people buying in a market where house prices have rocketed. In November both the Abbey and the Co-op announced they were to offer up to five times’ salary. Given the current market conditions, it would appear that high street lenders expect higher income multiples to play a greater role, especially in helping first time buyers get on the property ladder.
Another major change for 2006 has been the advent of the longer-term mortgage. Tesco has been just one of the lenders to offer a 50 year mortgage. The longer the mortgage, the cheaper the monthly repayments and, at least in theory, the more affordable buying a property becomes. For many in the industry, these methods of being able to borrow more are a natural consequence of house prices rising at a much higher rate than salaries.
But caution is still advised. Although the days of the ‘25 year and 3.5 times salary’ mortgage may have passed, questions still remain as to whether these changes really take into account matters of affordability. With shock-horror headlines about Britons’ indebtedness an almost-daily occurrence, and the latest insolvency statistics suggesting that 2006 will have been a record year (up more than 65 per cent on 2005), it’s worth remembering that it only takes one month’s arrears on a credit record for a customer to enter the growing non-conforming market.
According to recent figures from the Council of Mortgage Lenders, over five per cent of all mortgage lending in 2005 was ‘probably’ to people with ‘adverse credit’ problems. During 2006 this growth has continued and the market shows no sign of cooling off in 2007. This marked expansion makes the non-conforming market the largest specialist sector after buy-to-let.
A number of non-conforming lenders, including LMC’s sister brands Preferred and SPML, have moved away from income multiples and have instead switched to affordability-based lending using debt to income ratio calculations. These methods are designed to give lenders a more comprehensive picture of their clients’ finances, including any existing debt, thereby providing a clear insight into whether the client can afford the monthly mortgage repayments.
But it remains the case that for a large number of borrowers it is not impaired credit that prevents them accessing prime lenders but inability to verify sufficient income. A key advantage of affordability-based lending is that those applicants with multiple income streams or varied employment patterns can be accommodated, giving them access to a broad range of competitive and, more importantly, affordable products.
Another key advance in the non-conforming market is the change in assessment of CCJs. Instead of determining the financial value of a CCJ, LMC underwriters, alongside others in the market, will now be considering the number of CCJs an applicant presents.
Using value and not number of CCJs and arrears is a better measure of risk and presents intermediaries with a much wider choice. A client presents a much lesser risk with only one CCJ irrespective of its value. However, a ‘repeat offender’ with numerous CCJs, even if they’re small in comparison, indicates someone who has had a history of continual credit problems. Like other types of affordability-based underwriting, assessing by the number of CCJs rather than value provides a much more accurate picture of a client’s financial situation.
Looking ahead to 2007, it seems that only a few pundits are seriously predicting a housing downturn. It is possible that the MPC may take interest rates up to 5.25% in February in an attempt to cool the market, but in reality, prices will certainly still be climbing in the New Year. A healthy housing market is a good sign for the economy but it is important that lenders act responsibly and that borrowers don’t over-commit.
Any initiatives that provide a clearer picture of a borrower’s financial situation before agreeing to lend should be welcomed. As should underwriting developments that give more choice and drive down costs for the consumer.
