Name game

26 April 2010 | By Natalie Thomas

Complex prime is the latest term in vogue but the mortgage industry is divided over its true meaning. Some have hailed it as the return of sub-prime lending while others see it as a product for prime borrowers who have complicated circumstances, so could it be that its true meaning has got lost in translation?

Of course, the phrase complex prime is nothing new and has been heard in the industry from as far back as the 1990s, with lenders such as The Mortgage Works also offering complex deals in the early 2000s.

But at a time when innovation was prevalent in the mortgage market TMW’s and other lenders’ complex offerings slipped under the radar, attracting little attention.

In today’s mortgage market anything that sits outside a lender’s credit score or offers anything different from the strict criteria we have become used to attracts attention like bees to honey.

The words complex prime have been tossed around a lot in recent weeks, with Kensington’s new products and most recently GE Money Home Lending’s deals attracting the tag.

Some have mentioned the product in the same breath as sub-prime - a view that lenders have fiercely denied.

So it is not surprising that the emergence of complex prime has triggered a debate about whether sub-prime will return to the mortgage market.

“When I first heard the phrase I thought I knew what it meant,” says Robert Sinclair, director of the Association of Mortgage Intermediaries.

Sinclair says that to him the product name suggests that it is aimed at a prime customer - one with no adverse credit issues, no County Court Judgements, individual voluntary arrangements or history of bankruptcy, and a good payment history.

The complex element would come from the nature of the transaction such as the type of house involved, the mortgage term, a complicated income structure, issues with ownership or co-owners and so forth.

“But apparently not - I am now told it is for customers who have non-toxic debt stress characteristics,” he says. “So this is not bankruptcy or an IVA I assume, because in any world I understand these would be sub-prime characteristics.”

So is complex prime being wrongly branded sub-prime? Ken-sington argues yes. At the end of March the lender brought out a range that considers customers who have had CCJs or defaults registered in the past two years.

The lender also considers applicants who have had up to two CCJs totalling a maximum of £750, as long as these have been satisfied for more than six months. Customers are also allowed two unsecured defaults in the past two years as long as there have been none in the past six months.

But the lender stresses that this is prime lending and nothing like the old sub-prime. “If you were to choose a label for these products the one they would fall under would be complex prime,” says a spokesman for Kensington.

“We are a niche lender and con-sider customers who are overlooked by the rigid processing and decision-making systems of some other lenders. We think we should look beyond labels at how individual products meet borrowers’ needs.”

Kensington’s products may be seen by some as the return of sub-prime lending but for those who can remember the products on offer in the darker days of the sub-prime era they are anything but.

“I think a lot of complex prime is already being underwritten by lenders including high street banks, but it’s going through as prime,” the spokesman adds.

Although these borrowers have been interpreted as being complex prime by the wider market Sinclair disagrees. He says anyone who has been declared bankrupt, had an IVA or a CCJ against them can’t be prime unless these are from a long time ago and have been satisfied.

Sinclair says lenders will have differing risk assessment processes and abilities to price for these riskier applicants but in his view they are anything but prime.

“These are not prime products, complex or otherwise,” he says. “They may be near-prime or soft-prime, or another term such as light adverse.”

GEMHL is another lender that is offering help to borrowers who don’t fit typical lender credit scores. One of its products is for those who have experienced up to two defaults and another is for those with one CCJ and one default on their record.

Mark Snape, secured sales director at GEMHL, says complex prime customers are those who have suffered a slight blip on their credit records.

“We are being cautious and looking at mortgages on a case-by-case basis,” he says. “There are customers with layers of complexity who may not pass a typical credit score. The range we have put out is for prime borrowers and would have been classed as pretty standard borrowing a few years ago.”

Legal & General Mortgage Club recently launched a two-year fixed rate mortgage provided by Hanley Economic Building Society, with no need for a credit score.

The lender uses the term complex prime in the traditional sense and for products that are offered on a prime basis.

“Credit scoring has its place but complex prime cases are not always catered for by this approach,” says Martyn Smith, head of mortgage products at L&G.

“There are many reasons why an otherwise creditworthy borrower might generate a low credit score. Ditching credit scoring is an innovative way of looking at lending and the rate on this product is competitive.”

But does anyone know the precise definition of sub-prime? In its Mortgage Market Review the Financial Services Authority acknowledges that the industry is lacking a definition of what it classes as sub-prime lending.

“There have long been concerns about the lack of standard industry definitions in respect of self-cert, fast-track, sub-prime and related types of lending,” the MMR states. “In respect of sub-prime there has never been an industry consensus as to what a sub-prime mortgage is and what it includes.”

The FSA includes a definition of sub-prime in its notes for lenders completing their Mortgage Lenders and Administrators Returns. This states that sub-prime is impaired credit lending, defined as lending to a borrower who has a record of arrears on a mortgage or secured loan within the past two years, where the cumulative amount overdue at any point has reached three or more monthly payments. Or arrears on an unsecured loan within the past two years, where the cumulative amount overdue again reached three or more monthly payments.

Interestingly, it also classifies as sub-prime a borrower with one or more CCJs with a total value greater than £500 within the past three years, and similarly one who has gone bankrupt or incurred an IVA in the same period.

If the products from GEMHL and Kensington were to be assessed in this context they would fall into the sub-prime category.

But could it be that complex prime represents the middle ground between the two - an offering for borrowers that have a blip on their credit records and also complicated circumstances?

Whether the new offerings are classed as prime, sub-prime, near-prime or complex prime it’s what they represent and not what they are called that has sparked debate in the industry.

Some are questioning whether the next step from lenders offering complex prime is for them to offer sub-prime. Of course, the line between what is classed as prime and sub-prime has always been blurred but lenders will be reluctant to pin the tag sub-prime on any lending they do for some time.

“The question of whether sub-prime lending will return and whether it will be the same as it was pre-credit crunch if it does is being asked more frequently,” says Alan Cleary, managing director of Exact.

“Sub-prime lending in some form will return for the simple reason that there is a demand for it and someone at some point is likely to want to meet this demand.”

In the short to medium term Cleary believes we will see little if any activity at the heavy sub-prime end of the market because lenders and investors still have open wounds from the damage wreaked by poor lending practices in 2006/07, and it will be many years before those massive losses are forgotten.

“What we are more likely to see is some activity in the near-prime space,” says Cleary. “These products will be targeted at borrowers who have a good lending profile but have one or two minor blips on their record.

“Some borrowers will fit this type of product not because they have any adverse credit, but simply because they do not fit the profile of what high street lenders are looking for.”

Obviously, this represents a reversal from where the market was prior to the credit crunch. Back then lenders - especially those new to the UK market from the US and Europe - were aggressively looking to target borrowers struggling with debt.

An unscrupulous minority of brokers were keen to put prime clients on sub-prime deals because of the higher proc fees on offer. Rates were so low on some sub-prime deals that they were actually cheaper than the available prime products. In other words, pricing for risk was not on the agenda.

Anything that sits outside a lender’s credit score or offers something different is bound to attract market attention

Back then, even outwardly conservative lenders were looking at trying to get into sub-prime lending while the wheels were clearly starting to come off the securitisation juggernaut and global lending was starting to collapse.

Two years on, lenders are being driven by their risk departments rather than their sales divisions and the market is unrecognisable compared to how it used to be. In today’s market the definition of what constitutes a prime borrower is a lot stricter and lenders will not consider anyone who falls outside it.

“Mass market lenders have significantly increased their scorecard cut-off strategies since late 2007,” says Cleary. “Whereas previously they would have approved loans for borrowers who did not have a ’Pass A’ profile, this is no longer the case,”

“This means that there are literally millions of borrowers who are no longer prime, so by that definition they must be sub-prime.”

But whatever this new or old type of lending is referred to as, it has been brought back because the demand for this sort of product exists.
The recession has created an array of borrowers who have a minor blip on their credit record but otherwise should be considered worthy applicants.

So could complex prime be the new definition of sub-prime?

“Nature abhors a vacuum and product developers like nothing more than innovating to fill gaps,” says Julian Wells, co-founder of Marketing Innovation Forum and previously head of marketing at specialist lender Mortgages PLC.

“The recession will leave individuals with impaired credit records for years to come, just as it did in the 1990s, but with the recovery many of those consumers are getting back on their feet and eager to own homes again or remortgage.”

But demand doesn’t necessarily go hand in hand with creation and the sub-prime days of yesteryear are unlikely to be seen again.

“It’s great there are now more diverse product sets available but many are in niche areas, and the traditional specialist market is not being serviced,” says Wells.

A recent Mortgage Strategy straw poll revealed that 73% of online readers think sub-prime lending is not too risky to be reintroduced, with only 27% thinking it isn’t.

But it may not be lenders, borrowers or demand that have the final say in whether sub-prime will be revived. The FSA has already hinted that it will limit any return to sub-prime and what it considers to be risky lending so any lender wanting to operate in this market will have their work cut out.

“Regulation is likely to have an impact on the sub-prime market because it is clearly stated in the MMR that lending to borrowers who display multiple high risk characteristics will be difficult if not impossible,” says Cleary. “This in itself is likely to curtail some of the excesses of the past.”

Lenders are now being driven more by their risk departments than their sales divisions, as was the case before the credit crunch

It’s safe to assume that nobody in the industry would welcome a return to the sub-prime lending that led to the collapse of the housing market, but similarly the sector needs some form of innovation if we are going to be a nation of home owners and cater for those who have suffered as a result of the recession.

“There isn’t enough money in the system at the moment for every borrower’s demands to be met so some form of rationing will take place,” Cleary adds.

“The borrowers with the best profiles will be prioritised and the further down the credit curve you are the more difficult it will be to get a mortgage.

“Until the supply of money is equal to or greater than the demand of borrowers we will not see a return to anything like the heady days of 2007.”

When it comes to labelling sectors in the mortgage market there is never going to be a clear winner. The phrase complex prime is much like an ink blot - people will see what they want to see in it and it will mean different things to different individuals.

But there’s a danger that by defining everything and putting a tag on it innovation could be stamped out and a prescriptive mortgage market will be born that makes it difficult for many consumers to get on the housing ladder.

It may be that complex prime has masked the return of sub-prime in some form but that is less important than the service it is offering to borrowers. Perhaps William Shakespeare was right when he asked “what’s in a name?”

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