Learning from mistakes
How was the subprime market allowed to thrive in the years before and leading up to 2007-2008 then?
Mr Duncombe recalls: “A combination of self-certified mortgages, looser affordability checks and high loan-to-value (LTVs), in some instances over 100 per cent, created the subprime market of 2006.”
David Torpey, chief operating officer at Bluestone Mortgages, notes: “Pre-crisis, the majority of specialist lenders were owned by investment banks like Lehman Brothers, Merrill Lynch and Bear Stearns.
“These banks would originate and securitise loans as soon as possible post-origination and were able to transfer the entire risk exposure into the securitisation vehicle.”
Put simply, as Ms Nelson remembers, back in 2007 “the level of credit impairment was vast, with borrowers with severe credit issues being offered a mortgage”.
Since then, not only has the name of the market changed but, far more than that, lending and affordability guidelines are subject to more scrutiny.
Ms Nelson reassures borrowers: “The market has learned from the past, which means stricter rules are now firmly in place, with many of the lenders offering these deals looking more in-depth into a borrower’s history.”
Mr Torpey also believes the specialist lending market in the UK has changed considerably since 2007.
“Before the financial crisis, the market was dominated by self-certified mortgages, which were banned by the FCA after the crash,” he reasons.
“Mortgage lenders now focus on proven income, expenditure and stress testing to ensure that the mortgage, and all other commitments, are affordable in the current and future interest rate environment.”
More robust checks
He also insists that the banks’ ability to originate and securitise loans as quickly as possible, which he referred to earlier in this article, is now no longer possible, thanks to regulation imposed since by both the Financial Conduct Authority and the Prudential Regulation Authority.
“Current regulation now ensures there is a minimum 5 per cent risk retention for securitisation vehicles in Europe,” Mr Torpey reasons.
“Other changes, like loan-to-income (LTI) limits of 4.5 times the borrower’s income, and the significant reduction in the availability of interest-only loans has also had an impact. Combined with the checks put in place after the financial crisis, these changes have led to the far more stable and controlled financial system today.”
Mr Duncombe is also confident the factors that contributed to the financial crisis a decade ago do not exist in the subprime mortgage market anymore.
He acknowledges: “The specialist market is underpinned by the same affordability, regulation and stress protection tests as the rest of the market.
“Specialist lending is a natural extension of the mainstream market and a decade on from the financial crisis, the reforms and checks put in place have built a far safer and more robust financial system.”