Wayne Smethurst considers the recent product creep in the non-conforming sector and warns brokers that they’ll have to be on their guard to avoid falling income
Product creep. That’s not an alternative name for that strange animal that’s a mortgage product development manager, although it might be a suitable description for one or two of them.
No, product creep is what has been happening in the non-conforming market over the last few years and, looking at the latest lender product portfolios, products are still creeping.
Not all that long ago, a mortgage applicant with even the teensiest bit of a blip in their credit history would get a straight ‘no’ and be driven into the arms of the adverse lender.
Looking back now at the deals that were available, we would all consider the product pricing to be pretty extortionate. Reputations in the non-conforming market were low at best.
But things have changed. Adverse risks were analysed, customer behaviours researched, applicant profiling developed and by a couple of years ago adverse had been split into light, medium and heavy. And most of us thought that it would stop there.
Increased competition
But we reckoned without the amount of competition that continued to develop, the increasing sophistication of the customer analysis tools and the dawning realisation by lenders that they ought to centre their activities around consumer need. (Actually, non-conforming lenders say that they have always been centred on consumer need but let’s not put that to the test for the moment.)
So where are we now with product portfolios? Not just light adverse but ‘extra light’ and ‘minor adverse’. Then there’s the closeness of the non-conforming risk to a standard prime deal so we have ‘near prime’, ‘near prime plus’ and ‘almost prime’.
What will be next? Perhaps ‘just about prime’? ‘Prime but for a whisker’? How about ‘I can’t believe it’s not prime’? (One lender to whom I mentioned ‘I can’t believe it’s not prime’ took it as a serious proposal.)
I suppose I shouldn’t be surprised. I’ve held the view for some time that it would be the light adverse end of the market that would see the most competitive activity. Plenty of homebuyers piled into the sector when interest rates were going down and rates were at their lowest point.
On its own, the Base Rate rise from 3.50 per cent in July 2003 to today’s 4.75 per cent might not have caused too many headaches but while rates were low, homeowners increased their short-term borrowing and both personal loans and credit card balances have rocketed.
Climbing debt
The Council of Mortgage Lenders reported earlier this year that the number of mortgages three to six months in arrears is rising again – a sure sign that the number of deals with one or two months’ arrears will be rising at a faster rate.
Add to this Credit Suisse First Boston’s estimate that banks and credit card companies could have £4.5 billion of unsecured balances at risk of default and you begin to see some of the thinking behind non-conforming product portfolios.
And then there’s the eye that the lenders are keeping on the FSA’s maxim of ‘Treating Customers Fairly’. Is it fair, for example, to treat a customer who fails a credit score but who doesn’t have any adverse history in the same way as a customer who has missed one payment and has a small CCJ, and in the same way as a customer who has missed two payments and has a couple of small CCJs?
A lender that cascades straight from prime to light adverse will skip over these scenarios and may be deemed not to be treating their customers as fairly as they could – especially when compared with a lender that offers a fuller cascade.
So what does all this product creep mean in practice? Well, let’s start with product confusion and take Platform’s latest product portfolio as an example (sorry, Platform, nothing personal – yours just happened to arrive on my desk as I was preparing this article).
Looking at the various borrower types, the different risk criteria and the LTV’s, I counted over 140 product options. OK, this covers buy-to-lets and right-to-buys as well as all the others but it still makes for a complex portfolio.
From a consumer point-of-view, it’s difficult to argue with the complexity but from an adviser’s perspective it’s a different matter – advisers will have their work cut out if they’re not to choose the wrong option from among so many.
Price versus margin
Product creep brings another issue to add to the advisers’ woes. Near-prime products have near-prime pricing – stands to reason. But the better the price, the tighter the margin on the lending. And the tighter the margin, the lower the procuration fee. So advisers (and distributors) will be doing more detailed product research and spending more time but getting paid less.
Fortunately, mortgage advisers have tools and services they can fall back on to help them make the right choices. Electronic sourcing systems are getting more sophisticated in their ability to find the products that fit a defined set of circumstances but packagers are there as well and they can deliver two additional key benefits to advisers.
Packager benefits
Firstly, electronic systems deal in black-and-white – a product either fits or it doesn’t. Packagers, especially those with on-site lender underwriters, are able to deal in the grey areas that lie just outside the defined criteria.
So, for example, where there’s slightly more arrears but slightly lower CCJ debts, an underwriter can take a view and agree a better product/price option rather than force the consumer down the cascade.
Secondly, a packager can support the adviser/consumer relationship by cascading between lenders rather than just products from the same lender when additional adverse surfaces during processing. And the packager can make this easy by using generic forms and not charging for the re-write of the survey.
So where has all this product creep got us? Well, the consumer is the ultimate winner and I’m all for centring the market round the needs of the customer. But advisers have to be mindful of the reduced income that product creep brings and make full use of the services that help manage their costs.
Wayne Smethurst is senior partner of The Finance Centre
