FTAdviser.com

Advertising

A distinct lack of funds circulating in the mortgage markets at the moment has inevitably forced lenders to think of ways to control their volumes of business and more importantly repel high risk business. Unlike a year ago when lenders were flying high and writing all sorts of business in order to be part of the highly competitive market, today things are very different and lenders are having to be creative in ensuring they attract the right sort of borrower and use the small amount of funds they do have wisely.

Nick Allen, product and proposition manager for Platform, said the last year has seen dramatic shifts in lender's priorities.

Instead of focusing on increasing their business volumes they are doing the opposite and pricing themselves out.

Mr Allen said: "The market a year ago was a highly competitive arena, with an abundance of lenders all vying for a slice of the cake.

"Today, with the vast majority of lenders having pulled out of the market either on a temporary or permanent basis, those that remain have vastly different business priorities."

When referring to the main priorities of lenders, Mr Allen said: "Instead of focusing on maximising business volumes, market share or broadening the number of applicants that can qualify for a loan, lenders now are more acutely aware of the funds available to them and the need to be writing high quality business."

This is where pricing for risk comes into play.

The pricing of mortgage products at the moment reflects the current market conditions. They are driven by a number of factors, but the most significant driver is the shortage of mortgage funds.

Mr Allen said: "Pricing for risk has always been important, in good times and bad, but the restraints lenders today are currently attaching to their deals through higher rates are designed to ensure lending targets are strictly adhered to and the loan is of a suitable quality to perform well in the future."

When the sub-prime market was popular last year, rates were so competitive there was often very little difference between a prime and a sub-prime rate.

Helen Gee, marketing manager for Checkmate Mortgages, said the disappearance of sub-prime lenders at the start of 2008 had been a trigger for other lenders to err on the side of caution.

She said: "Several high profile and long standing sub-prime lenders have either stopped trading or cease to exist and there are far less mortgage products available than 12 months ago.

"Lenders today are certainly being more cautious about how much they will lend and who they are prepared to lend to and the current rates in the market reflect this."

The question is whether these lenders are actually being too cautious when it comes to pricing for risk.

Ms Gee said although it appears things could be going this way, in uncertain times lenders are going to do what they feel is best for their futures.

Bernard Clarke, communication manager at the Council of Mortgage Lenders, said within the context of a market where funding is scarce, lenders are making their own individual decisions about attitude to risk.

However, he said it was understandable lenders would all be averse to risk at the moment.

Mr Clarke said: "Anything that is attractively priced will be suddenly swamped and there may not be enough funding to meet this demand, therefore lenders are having to review their pricing of products and the availability of them much more frequently in current market conditions than they have done before."

Mark Maguire, head of external communications at GE Money Home Lending, said what started as a healthily competitive market last year soon spiralled into unrealistic and unsustainable pricing.

He said: "The fact the differential between prime mortgage deals and sub-prime mortgage deals was so slim is a good indication the market was not being priced appropriately for risk."

He said: "All consumer research suggests that borrowers understand the need for risk based pricing - and that blemishes on their credit file may result in higher rates. The key here is a customer's ability to repay that debt is carefully assessed."

Last year the market was arguably overcrowded, but now certain lenders have pulled out of the market either temporarily or permanently. Those that remain have to ensure they lend responsibly and that means to the right individuals at the right price.