Are specialist lenders well-placed to support the full recovery of the UK mortgage market?
Laurence Morey, chief executive of specialist mortgage lender Pepper Money UK, seems to think so.
As a result of the pandemic, he says there is likely to be an increase in the number of borrowers who can no longer be serviced by big banks because their borrowing needs have become more complex.
“[There will be] a reduction in risk appetite generally from the High Street banks, but more importantly [as a result of] our processes and approach to manual underwriting – albeit a paperless model.
"We underwrite each individual borrower. Having that skill set as we try and tackle an increased proportion of non-standard borrowers in the UK represents a real opportunity for the specialist sector.”
Morey adds that as High Street banks have increasingly moved to more automated solutions, this creates fewer and fewer points for human interaction to take place.
“It works perfectly if you are doing very low risk, relatively low loan-to-value loans,” he adds.
“There isn’t much need for human intervention. They have had to do that in order to drive up scale and drive down cost so they can continue to compete in a super competitive prime mortgage market.
“But I think what will happen as a result of the pandemic is that their appetite for risk will moderate, especially as unemployment starts to increase, so they will pull back from a risk perspective.
“Customers that have been through the pandemic and have become self-employed or taken a second job to make ends meet; those types of customers do not fare well with highly automated underwriting processes.”
Morey is very optimistic about the future of the mortgage market, but he remembers the challenges that lenders faced at the onset of the pandemic last March.
He says despite starting 2020 in a strong position, the pandemic caused Pepper Money to take "careful stock" of its plans for 2020.
With a team that had already been through the 2008 financial crisis, the main concern as the pandemic was breaking was the impact of the crisis on liquidity and how the capital markets would respond to the pandemic.
“So we took the decision early on to significantly moderate our volume. It was less a [concern about credit] and much more to do with liquidity,” Moret says.
“There was a period where we brought down our origination volumes during the peak of the pandemic. As soon as we could see the confidence coming back into the capital markets we invigorated and returned some of the products previously withdrawn.
“We were very mindful of the fact we are a broker-dominated business. Almost all our distribution comes from brokers and we were very mindful we continued to maintain the product range that was accessible to brokers, such that we did not contribute to the stress their business models would have been incurring.