MortgagesSep 7 2016

Lenders return to the sub-prime mortgage market

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Lenders return to the sub-prime mortgage market

Life can throw curve balls, which can make it harder for some people to secure a mortgage from mainstream lenders.

Banks and building societies have shied away from servicing those blighted by unconventional circumstances that pose a heightened risk to business following the 2007/08 financial crash.

This has been further exacerbated by the advent of the Mortgage Market Review – which placed ultimate responsibility for suitability of any product with the lender and not the adviser.

However, recent history has seen the proliferation of lenders focusing on consumer lending underserved by mainstream banks, including sub-prime and self-employed mortgages as well as bridging loans.

The Financial Adviser poll of 149 respondents showed that almost two-fifths of readers believe specialist mortgages will be a new business opportunity for them. However, just under half of the sample appear less confident, answering “possibly”.

Mortgage loans made to individuals with tarnished credit histories were widely blamed for sparking the global credit crisis of 2007/08.

There is ample regulation in the mortgage industry. I do not think there is too much or too little red tape at the moment. Matthew Bird

However, the market has seemingly risen from the depths of obscurity, with rating agencies Fitch and DBRS rating the first securitisation of a sub-prime loan since the crash, in June this year.

Fitch hailed the deal as a “trailblazer”, predicting that similar offers were to come in the third quarter.

The resurgence of sub-prime mortgages has provoked mixed responses from the survey participants who responded to a question asking them to rate whether or not they are more likely to advise on adverse credit than five years ago.

Only 14 advisers said they were a lot more likely, but a greater number of respondents (22) said the opposite. Just under a third claimed their attitude to the advice area had remained unchanged, while 30 per cent stated they were “somewhat likely” to offer advice in that circumstance. Another 22 respondents said they were a little more likely to assist clients with tarnished credit histories.

On the highest loan-to-value they would seek on an adverse credit mortgage, almost a third of advisers said 70 per cent LTV, ahead of 80 per cent LTV (32 per cent) and 90 per cent LTV (23 per cent).

Matthew Bird, investment and mortgage adviser at Newport-based Seer Green Financial Planning, said: “sub-prime mortgage applications can be a time-consuming process, but if you are dealing with these applications on a regular basis, you become more efficient and have a better understanding of which lenders are likely to approve certain cases.”

Key points

Two-fifths of readers believe specialist mortgages will be a new business opportunity for them

A third say their attitude to aderse credit advice has not changed in five years

Most respondents had not noticed a rise in the number of requests for bridging loans over the past 12 months

A short-term loan given to cover an interval between the purchase of one house and the sale of another is also a burgeoning area of the specialist lending market if recent data is anything to go by.

According to the Association of Short Term Lenders, its members, which include most of the key lenders in the bridging market, wrote £2.7bn of bridging loans in the year ending 31 March 2016 – a year-on-year increase of 16 per cent.

In addition, the value of applications increased by a fifth, but the value of the loan book dipped slightly by 4 per cent, which the association said indicates that loans are being paid off at a higher rate than previously.

However, the study suggests the development of the bridging loan market is not synonymous with the demand for advice in the area – despite the normal distribution for bridging loans typically done through brokers.

The majority of respondents (76 per cent) said they had not noticed a rise in the number of requests for bridging loans over the past 12 months.

This goes some way towards explaining any lack of enthusiasm expressed by the sample on that area of advice. Just over 63 per cent claimed they would consider a bridging loan for their client.

A little over 8 per cent said they were very likely to do so compared to the 14 per cent and 15 per cent of the sample who answered “quite likely” and “not at all” respectively.

Michael O’Brien, director at Essex-based Access, said: “A lot of advisers think having a discussion with clients on bridging loans is a waste of time. In the past, we have taken time to explore this option with clients and found them a lender, only for them to turn around and say ‘actually it is too expensive, I’ll try and find the money another way’.

“We [advisers] are also required to have a number of bridging sales under our belt before we can trade with some lenders.”

Brokers point to costs, high interest rates and regulations as significant barriers to the expansion of the specialist mortgage market.

Mr Bird said: “There is ample regulation in the mortgage industry. I do not think there is too much or too little red tape at the moment. We certainly do not want to go back to pre-crisis days when lenders were handing out loans willy-nilly.”

Mr O’Brien concurs, adding the level charged by mortgage packagers on top of the advice threatens to price unconventional borrowers out of the market.

He said: “The use of technology in the market needs to improve. Generally speaking, the application process is paper based and can be quite comprehensive. I do understand why this is so, because specialist mortgage applications are complex by nature. A simple tick box questionnaire would not suffice in the suitability process.”

Myron Jobson is a features writer for Financial Adviser