Hanging on
Share
Although enquiries are climbing, regulatory uncertainty and the funding drought are testing the resilience of the secured loans sector
The secured loans market is facing an uphill struggle at the moment, with many firms finding uncertainty and the challenge of surviving the recession insurmountable.
The secured landscape has changed dramatically in the past three years, with business volumes falling by more than 90% from their peak. Although the market is starting to see light on the horizon there are question marks over its future. Changes in the way firms are regulated and how they sell payment protection insurance are threatening its survival, along with funding constraints.
Two years ago the secured loans market was a different place. West Bromwich had just launched its secured loans subsidiary White Label Loans while lenders such as Southern Pacific Personal Loans and First Plus were bringing the sector into the mainstream domain.
But when the credit crunch hit the sector suffered as lenders started to withdraw and secured loan packagers found it hard to place business.
The past 12 months have brought little joy, with the Financial Services Authority introducing new measures for firms selling PPI which require them to reopen some 185,000 previously rejected complaints and reassess them.
In the past the market has relied heavily on income from PPI sales and if the FSA decides to introduce stricter selling guidelines, it could kill off some businesses.
The regulator is also launching targeted assessment of sales practices for PPI on secured loans and credit cards. If the potential for mis-selling is identified proactive reviews by firms may be extended to these areas too. The Association of Finance Brokers is concerned these measures could lead to the application of today’s standards to the work of yesterday.
Lesley Titcomb, director of small firms at the FSA, warned at the recent Mortgage Business Expo that its review of PPI could push some firms over the edge and tempt them into phoenixing.
“Our recent consultation paper on PPI raised the prospect of companies having to reassess PPI complaints they have previously rejected, and some believe this means more organisations will try to become phoenix firms,” she told the audience.
On top of this, the sector is facing the prospect of FSA regulation. This has not gone down well with some in the industry who are worried the regulator does not fully grasp how the business operates. At the moment, all secured loan firms fall under the Consumer Credit Act and are regulated by the Office of Fair Trading.
“I hope the FSA doesn’t get hold of secured loans but it is almost inevitable that it will,” says Simon Stern, director of secured loan lender Prestige Finance.
Stern fears the FSA could take a one-size-fits-all approach to the secured loans sector.
“The FSA needs to be sure it understands the market,” he adds. “The CCA has worked well and there are some aspects of FSA regulation, such as its capital adequacy requirements, that would not work in the secured loans sector.”
The Finance & Leasing Association, which represents secured loan lenders, is also dubious about the plans and says there is no evidence that consumers’ rights are not already adequately protected under the CCA so shifting the regulatory control of second charge mortgages from the OFT to the FSA would be like using a sledgehammer to crack a nut.
In its recent Mortgage Market Review the FSA recognises the need for secured loans.
“Second charge lending potentially provides a cost-effective borrowing option as an alternative to either remortgaging or taking out a further advance,” the review states. “This is particularly the case where there might be significant early repayment charges on the first mortgage.”
But the regulator has raised concerns that the second charge market could be the first port of call for consumers turned away from the first charge mortgage market.
“Not only would this potentially involve higher costs and be less affordable for the consumer, perversely it would also mean that they would not have the benefit of the regulatory enhancements that our proposals aim to deliver,” the review says.
Gary Bailey, director of lender Blemain Finance, says he is in favour of anything that improves the sector but care must be taken to ensure that a transition between regimes does not prove detrimental to the market by creating confusion for lenders and borrowers.
“FSA regulation is principles-based whereas CCA regulations consist of precise requirements that lenders must meet in terms of their practices and products,” he says. “Changes to the framework must not stifle the sector with over-regulation in an attempt to make these two approaches work in unison.”
As brokers and lenders await the outcome of the FSA’s review they are having to contend with more immediate issues such as the prevailing lack of funding.
“We still have our three lines of funding but whether we will have these next year, who knows?” says Stern. “We are optimistic but we can’t make serious plans because we just don’t know. But our lending in Q4 2009 will be higher than in Q1.”
Troubles in the first charge mortgage market have helped boost the sector. The lack of specialist products such as self-cert has led an increasing number of brokers to look for opportunities in the secured loans market.
Specialist secured loans firm Your Broker Network says it is seeing more mortgage brokers approach it for access to self-cert secured loan products due to the dearth of self-cert deals in the mainstream market. But the maximum LTV available is only 55% so applicants needing more than this need reference letters from accountants.
Master broker V Loans also says its enquiry levels are 50% higher than they were six months ago, and that some 65% of these are from brokers looking to raise capital but finding they cannot access remortgage deals due to lack of facilities, particularly in the areas of sub-prime and self-cert.
“Savvy brokers recognise that secured loan providers such as us can still provide them with facilities to place their sub-prime and self-cert cases,” says Dave Pinnington, business development director at V Loans. “As lenders specialising in these areas have either cut back or pulled out we have seen our enquiry levels increase substantially. For example, since Beacon Homeloans’ announcement that it was pulling out our daily enquiry rate has doubled.”
Blemain Finance says a significant proportion of its business is with borrowers with only slightly adverse credit records but for whom the lender is the only option in the current market.
“In the longer term we will see a gradual return to a more active secured loans market,” says Bailey.
“But any growth in second charge lending will depend on capital markets reopening and supporting recovery in the housing market. Many consumers who were already on high LTV mortgages before the recession will need time to build up equity in their property before they consider secured loans.
“Banks are likely to focus on first charge lending until their balance sheets are looking healthier and only then will they look at funding the second charge market,” he adds.
Bailey points out that the other side of the coin is that many consumers who would like to raise capital using their property as security would be better off taking out second charge loans than remortgaging.
“We may see a strong demand for secured loans from a particular type of home owner, specifically those who have suitable equity in their property and want to release capital but don’t want to remortgage and lose the benefits of their current deals,” he says. “A secured loan could be the best option in these cases.”
Although there are circumstances in which a secured loan may be the best option, with some brokers there may still be an image gap to bridge.
“The secured loans industry has changed and brokers are having to work harder to place business,” says Darren Grace, operations director at packager WLM Money. “Regulation has also helped clean up an industry that used to be frowned on by mortgage brokers, IFAs and customers.”
Although secured lending can now only be done to a maximum LTV of 80% through a handful of lenders, there are still opportunities for mortgage brokers.
“There are some excellent products for customers tied into their mortgages, those who need to consolidate and those starting to see credit problems,” says Grace.
“These deals feature only one month’s repayment penalties as long as a month’s notice is given. This kind of flexible product has a place in today’s market. Gone are the days of volume for lenders - they must now concentrate on quality.”
Grace believes the industry will continue to face tough times in the first half of next year but says this could change quickly if new lenders enter the market.
“A lot depends on house prices and if they continue to rise I’m sure confidence will return,” he adds.
As with the first charge mortgage market there are rumours that new lenders are looking to launch into second charge mortgages.
John Prust, former director and founder of Southern Pacific Mortgage Limited, and Robert Owen, founder of London Mortgage Company and White Label Loans, are two of the names in the frame to launch into the market. Both are keeping quiet about their plans until they have secured funds to launch.
But there are fears that FSA intervention could have a detrimental effect on lenders entering the market. If the regulator decides to restrict lending to organisations with substantial funding it could be bad news for aspiring entrants.
Some in the industry will remember the troubles in the economy during the 1990s. Back then, the secured loans sector was first to recover and some predict the same will happen again. Indeed, during this recession demand for secured loans has remained high but if this is not matched with funding the market’s future will continue to hang in the balance.
So the sector has been through tough times before and managed to cling to life. There’s little doubt it is now facing one of its most challenging and uncertain periods but given an adequate flow of funding and with the right professionals fighting its corner there’s no reason why the secured loans market can’t return to buoyancy once more. But there are a few obstacles to be surmounted before its survival can be assured.
Brokers’ voice still matters
Robert Sinclair
director
Association of Finance Brokers
The secured lending and broking sector has been affected by the recession more than any other. It is now lending at less than 10% of its peak, with insurance income similarly reduced. While a few lenders remain their ability and appetite to lend is severely curtailed.
Meanwhile, broker firms that have survived are pale shadows of their former glory, with only the most experienced staff left to serve clients.
While the past two years have been tough and decisive for many the next few months will be critical for the secured loans broker market. As the Financial Services Authority finalises its rules on how PPI complaints should be handled, we at the AFB will be fighting to protect the interests of all firms while protecting customers’ interests.
Current proposals from the FSA are largely based on factors in the unsecured personal loans market. Similarly, the remedies are for firms in which sellers, lenders and insurers are within the same legal entity. They do not cater for the broker market so we are asking for more time before we are required to adopt any changes.
The recent victory by Barclays in overturning the Competition Commission’s proposed ban on point-of-sale PPI policies shows that in complicated areas our regulators do not always get it right first time. Proposals sometimes involve a degree of retrospection that our members find hard to accept so we are adopting a tough line on this.
Secured loan lenders and brokers are clinging to their businesses by a thread and any further costs will push most over the edge. It is against this background that we are discussing with FSA and the Financial Ombudsman Service the most equitable outcomes for firms and consumers.
The OFT has also added to the pressure by its consultation on irresponsible lending. This has moved so far beyond its original scope that we have again had to take a hard line. It should have simply set out issues that could lead to firms losing their licences but instead has become a set of rules, guidance and best practice notes. This exceeds what is set out in the Consumer Credit Act so we have issued a strongly worded response.
Lack of liquidity in the first charge market is limiting customers’ ability to refinance. The low Bank of England base rate also make disturbing existing arrangements expensive, which should mean an opportunity for second charges loans if lenders are there. We are concerned that the FSA and OFT are limiting new entrants and applying rigorous capital constraints on those already in the market.
We will continue to fight your case with all regulators. Rest assured that the brokers’ voice still matters and is being heard.
Regulatory seeds of confusion
Fiona Hoyle
head of consumer finance
The Finance & Leasing Association
Mortgage regulation is once again in the spotlight following the publication of the Financial Services Authority’s Mortgage Market Review, and this time the regulator’s influence could be extended to include second charge mortgages.
Of course, the question of second mortgage regulation is not new - the issue is a long-standing tug of love, with the Office of Fair Trading on one side and the FSA on the other while the Treasury acts as referee.
But the market being fought over has changed rapidly since last year. Lending in the second charge sector fell from £2.8bn in 2008 to under £500m in the first three quarters of 2009, solely due to funding constraints.
We are pressing the government on this issue, as its liquidity schemes have so far been restricted to deposit-taking lenders. As around 75% of second charge mortgages include some form of debt consolidation the knock-on effect is that fewer consumers are able to consolidate higher priced debts at more affordable rates of interest, just when they need it most.
Second charge lenders are not opposed to a move to FSA regulation but they have yet to be persuaded that there is a compelling case for change. As well as being regulated under the Consumer Credit Act’s comprehensive regime, in June this year the OFT introduced new standards for second charge mortgages.
These will be further enhanced by OFT requirements for avoiding irresponsible lending due to be introduced in early 2010. The Treasury will also consult on second charge mortgage regulation before the end of the year. Few other sectors have seen such a rapid pace of regulatory change in the past 12 months.
If the case for regulatory reform is based on nothing more than the theory that it seems sensible for all mortgages to be regulated on the same basis, all lenders ask is that the passage of reform is efficient. Early indications are that this will not be the case.
The simple route would involve all new lending coming within the remit of the FSA from a specified date. But the prospect of transferring existing CCA-regulated second charge mortgages to the FSA’s Mortgage Conduct of Business regime could be fraught with legal technicalities so the easy option would be to leave existing loans under the CCA.
The question then is whether this part of CCA lending should be regulated by the FSA or the OFT. The FSA has little expertise in CCA lending but if the OFT retained responsibility lenders would be left with two regulatory regimes for the same mortgage book. This scenario is far from ideal and could last for some time, but for now second charge lenders battle on as they face further change with scant evidence of a need for reform.
An opportunity to be grasped
Steve Walker
managing director
Promise Solutions
Industry pundits have preached the need for mortgage brokers and IFAs to diversify into loans for years but despite this, during the credit crunch the message seems to have largely fallen on deaf ears. It seems that many brokers have not entered the sector because they don’t understand the products or when secured loans are applicable. They lack the confidence to offer loans to their clients.
This is surprising given that within an hour brokers can gain enough understanding and skill to grasp the loan opportunities currently passing them by.
With an average commission of more than £1,100 for an hour’s work it is staggering that so many mortgage brokers have failed to make the effort to get engaged in the sector, or even to find out that secured loans are still available for self cert, buy-to-let and heavy adverse applications.
But while some have grasped the opportunity we must accept that until recently there has been insufficient incentive for brokers to engage with the sector. But the experience of recent months points to a marked shift in attitude, evidenced by a 50% increase in application levels since August.
This is backed up by a notable rise in the number of conversations I have had with brokers who admit they have overlooked loans for some time but are now adding loans to their core offering.
Positive changes from lenders such as Nemo, Blemain Finance and Black Horse have helped in the placing of secured loans and brokers are starting to realise that loans provide one of the few remaining options for self-cert and adverse applications. This is emphasised by the recent announcement that Beacon Homeloans has ceased funding new applications.
The increased demand from brokers for secured loan products is matched by a fresh hunger for knowledge and understanding of the sector. Despite the continuing shortage of funding, lenders and certain master brokers are keen to meet this demand.
With many large loan brokers leaving the market and others facing potentially terminal costs of payment protection insurance redress lenders want to develop their distribution models to engage with traditional brokers.
They are doing so this via the limited number of master brokers on whom they rely for compliance and packaging expertise. And it’s to these master brokers that mortgage brokers and IFAs are turning to for help in becoming proficient in offering secured loans and maximising their income potential.
It will be interesting to see how much of the loans market will be serviced through mortgage brokers and IFAs next year. The opportunity is there for those wishing to grab it. ”
If you enjoyed this article, sign up here to receive daily email updates from Mortgage Strategy and Follow @mortgagestrat
