Second charge mortgage market faces uncertain future

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Second charge mortgage experts are split on the future of the market after it became FCA regulated this week.

The Mortgage Credit Directive came into force on 21 March and brought the second charge sector within the scope of FCA mortgage regulation for the first time.

Second charges were previously regulated under the Consumer
Credit Act but FCA Mortgage Conduct of Business provisions applied form 21 March.

As a result many of the rules now governing the first charge lending market – such as income verification, affordability checks and disclosure requirements, as well as a requirement for an advised sales process – will be applied to the second charge sector too.

Some CCA provisions will be carried over into the FCA regime, including banning interest being increased on default and the right to an early settlement rebate.

The FCA said in its original consultation paper on regulating second charges that it expected the effect of its proposals to be a 20 per cent reduction in lending volumes, which it believes will amount to around £100m.

Some second charge experts agree the immediate effect of the MCD will be to cause the second charge market to shrink.

Positive Lending managing director Chris Fairfax says: “There will be a contraction of the market until the products improve so the impact of stress to both first and seconds can be alleviated slightly.

“Everyone I’m speaking to is talking about a retraction.”

Dragonfly Property Finance managing director Mark Posniak says: “There will potentially be a slowdown in the market in the short term as the usual teething problems arise and things start to bed in.

“Every event like this is an opportunity if a lender has the necessary skills and processes, not to mention risk, in-house. So while we may see some turbulence in the short term, I expect the overall trajectory of the market to start picking up in the medium term.”

But others think the introduction of the MCD will immediately boost the second charge market.

Vantage Finance director Lucy Hodge says: “Tougher regulation is a positive for the market. It
will make certain products more widely used, which perhaps before was seen as a small niche part of the market.

“By raising standards, that will naturally lead to greater volumes, even if there is a small wobble while people are getting used to the new regime.”

Hodge says the FCA has overestimated how much the second charge market will shrink.

She says: “They’ll have had their eyes opened since then, as have we all. We’ve seen a vast number of businesses apply for consent with the FCA, probably more so than the FCA ever would have anticipated.

“By virtue of the fact that mortgage advisers have a duty to consider second charge mortgages with any remortgages, I can’t see how it can’t grow.”

More than 100 lenders and brokers had applied for second charge permissions by February, according to FCA director of retail lending Philip Salter.

The introduction of new regulation could also be the catalyst for huge growth in the second charge market if mainstream lenders start offering these loans and take market share away from the current specialist lenders.

All the biggest lenders contacted by Money Marketing, including Nationwide, Lloyds Banking Group and Halifax, HSBC, Barclays, Yorkshire Building Society and Virgin Money, all say they do not offer second charges and have no plans to do so.

Posniak says large lenders are always likely to steer clear of second charge loans.

He says: “Mainstream lenders moving into second charges is highly unlikely. We’re talking about two entirely different mindsets, appetites and approaches to lending.”

But John Charcol senior technical manager Ray Boulger says the seconds market could eventually see an influx of mainstream lenders diluting the current specialist lenders.

He says: “While I am not aware of any mainstream lenders that are prepared to go into the seconds market, there is an opportunity there for some.”

Boulger adds in the past many mainstream lenders lent secondary secured loans on mortgaged property, so could do so again.

But in the short term Boulger says it is more likely specialist second charge lenders will diversify.

He says: “It’s the seconds that will converge with the first charge market, not the other way around.”

The MCD could also encourage more first charge brokers to start offering second charge products.

Fairfax says: “Secured loans are a strange part of the sector. Brokers have been unable to access secured loan lenders directly, they have always had to source these products through master brokers or packagers. That has meant the knowledge base in the industry outside packagers and master brokers is very thin.

“But it will improve and there will be brokers who want to be independent, which means they have to give advice on all aspects of secured lending, both first and second charge. If they are to outsource any advice relating to second charges to a third party they have to drop the independent label.

“Certainly not in the short term, but in three or four years, it will be quite common for a mortgage broker to have direct access to both first and second lenders.”