Why subprime has returned

Homebuilding has still not returned to pre-crisis levels in the UK either, according to government data last year.

The data from the Department for Communities and Local Government revealed just 217,350 more homes were created in 2016, compared with 223,530 in 2007-2008.

In a press release last year, investment platform Homegrown pointed out: “It was a decade ago this year [2017] that the subprime crisis took hold, causing the rate at which the country added new homes to tumble by 18 per cent and 21 per cent in 2008-2009 and 2009-2010 respectively, falling as low as 124,720 in 2012-2013.”

The subprime market and other areas of the housing sector took a hit in the immediate aftermath of the crisis – one which the housebuilding market is still trying to recover from.

Signs of life

Yet there remains a need for products designed specifically for those with poor credit ratings who need a helping hand onto the property ladder.

There are signs of providers returning to the subprime market.

David Torpey, managing director of Bluestone Mortgages, insists there has always been demand for mortgage products that fall outside the credit appetite of high street banks.

“Yet the availability of suitable products largely disappeared from the market post-2007 due to reduced funding capacity from investment banks and unaffordable rates,” he recalls.

According to Moneyfacts.co.uk, there were 8,148 credit impaired products in July 2007. Today, there are just 713 products.

The main reason for the return of subprime is the emergence of new lenders over the past few years [who were] prepared to target this market, as funds available for mortgage lending increased.Ray Boulger

Charlotte Nelson, press officer at Moneyfacts, confirms: “There is a still a need for these types of deals and with this level of demand many providers have stepped into the void to offer [help to] these borrowers, who may have been overlooked by a mainstream provider.”

Many of the largest lenders are hesitant about stepping back into this area of the market, even though the term subprime has been dropped in favour of terms such as 'credit impaired' and 'specialist lending', which have fewer associations with the 2007 crisis.

The absence of high street lenders in the subprime space has left room for smaller specialist lenders, however.

Ray Boulger, senior mortgage technical manager at John Charcol, says: “The main reason for the return of subprime is the emergence of new lenders over the past few years [who were] prepared to target this market, as funds available for mortgage lending increased and some of these new lenders had to look for niches and parts of the market which were not well served.”

He notes: “Benign conditions, such as very low levels of mortgage delinquencies, exceptionally low interest rates and house prices stable or rising, also encourage lenders to move up the risk curve.”

Helping complex borrowers

Mr Torpey points out over the past five years, traditional specialist lenders, such as Kensington Mortgages and Precise Mortgages, have “expanded exponentially with the improving securitisation market”.

“Private equity investment has also helped these lenders expand their product ranges to meet the demands of complex borrowers, such as self-employed workers and contractors, or those using Help to Buy and new build schemes,” he explains. 

“Other specialist banks, Aldermore and Secure Trust Bank, for example, and finance companies – Bluestone Mortgages, Pepper Money, Together Money and Vida Homeloans – have since launched into the market due to the attraction of the credit profile, margins and performance of these customers.”

He argues that improved regulation of the sector, as well as “healthy” competition between lenders, has helped to drive down costs for borrowers.

In June 2017, Pepper launched a new near prime, or NP, product as part of its core residential range aimed at those with marginal high-street credit score fails. 

It confirmed the product can also accommodate those borrowers with no county court judgments (CCJs) or defaults in the last 48 months.

Rob Barnard, sales director at Pepper Homeloans, explained: “Adverse credit records remain on file for 72 months, despite the fact that borrowers may have conducted their finances in an exemplary fashion in recent years.”

The UK is seeing a rise in contractors and self-employed workers who now represent 15 per cent of the UK workforce and demand for lending options for this group is set to grow.David Torpey

Ipswich Building Society also launched a range last year for borrowers who want to “get back on track”, claiming that its more flexible underwriting approach means it could help people who usually “fall outside of the brackets defined by many larger mortgage lenders”.

Its SOS mortgage range comprises three products for “increasing tiers of credit repair”, with the idea being that borrowers who make all payments on time over the initial discount rate period can transfer from the specialist SOS product to any of the building society’s standard mortgage retention products.

The rise of the self-employed

“With nearly 5m self-employed workers in the UK, unusual income patterns, demands and habits have become a lot more common, but lenders who adopt automatic credit scoring will often reject a mortgage application from these workers, as they don’t fit traditional lending criteria,” explains Jeremy Duncombe, currently director of Legal & General Mortgage Club.

Lenders now are focusing on the changing needs of borrowers.

Mr Torpey observes: “The total lending volumes of specialist lenders are a fraction of the numbers seen in 2007. However, the UK is seeing a rise in contractors and self-employed workers, who now represent 15 per cent of the UK workforce, and demand for lending options for this group is set to grow.

“Though the number of CCJs registered has increased over recent years, the average value has fallen from £3,600 in 2008 to £1,700 and has largely been driven by an increasing speed in which phone and utility companies are registering defaults for small amounts.”

Mr Duncombe recognises the rise in the number of self-employed does not mean that these customers are any less likely to meet their financial commitments. 

“Instead, it might be that they draw their income from different sources, such as dividends, or might have experienced a minor credit event in the past, such as a missed phone bill. As a result, there is now a need for lenders to service this growing sector by taking a more manual, attentive approach to underwriting.”

eleanor.duncan@ft.com