It is often said that education is the key to the success of the financial industry and financial health of the population as a whole. For consumers to understand the ins and outs of the market and recognise what is available to them is vital to helping them on to, and up the property ladder. The mortgage industry continuously strives in these affordability stricken times to develop products that get previously untenable customers onto their books.
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Yet, the industry must be educated by each other as well and while lenders have become more flexible and the amounts being borrowed increase every day, there is a limit to how much lenders and borrowers can risk. This is never more apparent than the crisis currently being played out in the American non-conforming market, as risky products and lending decisions come back to haunt specialist lenders. The situation has certainly made people in the UK sit up and take notice, with grim mutterings on how this could affect the British market, while others believe a similar situation could land on UK shores.
Sensible
Mike Fitzgerald, sales director at Brentchase Financial Services, believes that non-conforming lenders were certainly not pricing for risk prior to the downturn of the American market, with the edges between prime and non-conforming deals becoming blurred and indistinct. Yet, he feels that lenders, especially specialist ones, are becoming more sensible, realising that while market share is important, they need to make a profit.
He says: “Professional brokers came to the assumption a while ago that products were not profitable and lenders were buying in business and pricing for market share to get a foot in the sector.
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“The US problem is not contagious, but non-conforming lenders are starting to be a bit more sensible. Some are cutting back on commissions and it’s all part of the same plan to make non-conforming a bit more profitable.”
Yet, Fitzgerald acknowledges the American problem cannot directly compare to the UK market, because loan-to-values in the US are much higher and firms were lending to people that shouldn’t be loaned to. He adds: “Pricing here should be more sensible with rising interest rates. I believe we will start to see differentials starting to expand and this is good for the market as a whole, as that’s the way it should be.”
No evidence
Nevertheless, Ray Boulger, senior technical manager for John Charcol, states that increasing prices is not necessarily a sensible option for lenders. He explains: “What is sensible for lenders would be the opposite for consumers. There is no evidence yet that the problems in the US are having an impact on pricing here. The US non-conforming market is very different to the UK and the sectors there have types of deals that aren’t available here. It is some of the riskier loans that are causing the problems and they have a number of deals that are really dangerous. In some cases, the increase in payments is several hundred per cent and people take them because they couldn’t get a property otherwise.”
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Boulger comments that the issues for UK non-conforming lenders will be in what investors start to do. “The contagion is spreading. The UK is the second biggest non-conforming market after the US and the investors that look at US bonds are also the ones looking at UK bonds. Investors are asking a lot more questions about bonds and being discerning. This could mean an increase in funds because the investors are more cautious.”
He adds: “For lenders that securitise, they can increase prices to keep their margins, or if they choose to keep their prices now, they may choose to cut margins to keep their volume. The US situation will have an impact on pricing, but I wouldn’t expect it to be more than modest.”
Many factors
Boulger points out that price increases can be down to many factors, including swap rates. He explains: “There haven’t been noticeable changes in pricing or criteria yet. It depends on what questions investors ask.
“The situation in America certainly has lenders concerned because it could affect the cost of funding. It has to be a concern.
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The extent that investors in bonds are more picky will influence what lenders do. There are certainly signs that investors are looking more carefully at the quality of bonds. I doubt it will be a huge difference in pricing. There is no doubt that lenders will look for market share, but will only do so when it is profitable. I think lenders in the non-conforming market would be pleased to increase their market share, but only if it was profitable.”
America and Britain’s ‘special relationship’ has certainly had some interesting results, and some find it disconcerting how closely the countries can be linked. However, while the problems facing the US non-conforming market should not be underestimated, it seems the ripple effects from across the pond to the UK could be limited. It should be remembered that lending can only handle so much risk before everyone, from the lender to the borrower ends up in strife. The fallout for the US economy will continue and UK lenders should take this opportunity to assess how much risk they can really handle.
