Does the specialist lending market have enough players, or are disturbers needed to wake up an entire mortgage industry that is ‘still wearing flares’? Mortgage Strategy held a roundtable to find out
The history of specialist lending is defined by boom and bust. When the Council of Mortgage Lenders started to record lending figures in 1998, specialist lenders were a cottage industry with around a 6 per cent share of the market.
But the market boomed, and specialist lending hit its high-water mark in 2008 when the sector represented 35 per cent of the market, with around £426bn of outstanding loans. Then came the bust. The sector slumped after the financial crash, accounting for just 0.1 per cent of new loans in 2010. But specialist lending is coming back strongly, according to experts. The latest CML figures show that specialist lenders have clawed back around 4 per cent of the market, and their future looks brighter still.
Mortgage Strategy, in association with Together, invited some influential figures from the specialist lending market to a central London roundtable to review the sector and speculate on its future.
- Martin Reynolds SimplyBiz Mortgages chief executive
- David Whittaker Mortgages for Business managing director
- Jonathan Clark Chadney Bulgin mortgage partner
- Rob Jupp Brightstar chief executive
- Rob Sinclair Association of Mortgage Intermediaries chief executive
- Gary Bailey Together sales director
Are there enough specialist lenders in the market at the moment and which areas of the market are most under-served?
Reynolds: I don’t think we need more specialist lenders. We just need the lenders we have to offer criteria that cover the areas we need and maybe are short of.
Whittaker: It would be very difficult for any new lender, with its investors and banking lines behind it, to jump straight in. Its business plans would be based on some degree of market normality, after which it could expand into other spaces. Existing lenders are now stabilised and well funded. You might expect them to broaden their bandwidth somewhat but you wouldn’t expect a new lender to jump straight in. It would get a degree of oversight from the folks down at Canary Wharf if it did that.
Clark: The main problems are the source of income and credit. The source of income is typically someone who is recently self-employed. They are still very poorly served across the market. If you’ve been self-employed for less than two years, you are very restricted; less than a year and you’ve pretty much had it. Some lenders will do it, but not many. The other problem is credit, and we find this increasingly. We’ve just come out of a recession and typically 30 to 40 per cent of my prime applications will have some credit infraction at some point. If it’s in the past two years, we have very few options for those clients. But I think we are seeing innovation in buy-to-let.
Sinclair: Part of the issue is that certain institutions are looking for margins somewhere and they’re driving into niche markets. Regional building societies and Kent Reliance are good examples of that. They look at their cost and capital base, and they have to move into slightly riskier areas to get the return they want. I think the challenge is more and more consumers have got a credit blip somewhere, almost always inadvertently. Even seven years ago that wasn’t important.
Clark: A typical case is someone who has fallen out with their utility company and can’t resolve it.
Sinclair: Employment changes are another big issue. A lot of people are into a portfolio career, or they have to take contract-type work much more. Because the big lenders haven’t evolved to reflect that, because they want that factory approach, the risk evolution and having underwriters in there make it expensive because it all has to be manually underwritten. You’ve got to have relationships and trust in there, so it’s all part of a much more complicated market. The good news is that makes it better for brokers.
Is there simply not enough innovation in the market?
Bailey: When you look at the market you’ve got mortgages, secured loans and bridging products. Beyond that it’s down to lenders’ own criteria and things like which income proofs will be accepted. A lot of criteria will either make or break the case for the customer. If you get into property types, you’re looking at standard and non-standard construction properties, so you’re into things like HMOs and buy-to-let. Is that innovation, or is it where lenders’ appetite lies and whether they’re willing to take that risk or not? All those things are not necessarily innovation, they are just meeting customer need and diversifying what you offer. There are opportunities out there that aren’t being defined.
Jupp: You’re spot on there. It’s a frustration that we’re saying there is a lack of innovation in the market. In the mainstream market, I agree 100 per cent. It’s a sterile, lifeless, soulless market. But in the specialist market it’s the opposite. There is a lifeblood of opportunity and innovation. I don’t share the rest of the group’s realism regarding the lack of innovation. I think anyone that comes in now has got to be a disturber. That is now quite fashionable, but the mortgage industry is still wearing flares so it doesn’t quite get it at the moment. Some lenders have nibbled away and tried to change things, but it’s still small scale. I think disturbers will come in.
The big issue today isn’t so much the self-employed. The concern I have is the A-word: affordability. It scares the living hell out of me when I hear that first-time buyers in London are looking at an average multiplier of seven or eight times to get their first property. And obviously we have schemes like Help to Buy London, but the question is: how does that market react to the fact that most property prices are unaffordable for most people in the South-east, which is where most people want to live right now, rightly or wrongly?
Reynolds: Rob’s right about affordability, but I don’t think it’s just in the South-east. It’s more obvious in the South-east but the further north you go the harder it gets, in certain instances. You only need to have a £50 outgoing a month in some cases and that affects affordability, because you’re looking at more low-income families. I think the challenge we have is most high-street lenders are hitting their targets, so they don’t need to play along the risk curve. They prefer to play the margin curve rather than widening that affordability and potentially having to put up prices, which would take them out of the top quartile of pricing, which probably means they wouldn’t get the normal business they’re getting already. So you need disturbers in the mainstream market as well.
Jupp: But in the absence of their being able to do that, the evolution of the UK mortgage market has shown that the disturbers have normally started in the specialist market, where they have a rich environment for entrepreneurially led businesses. They get to a scale where they look at what they can do in the mainstream market. We may not have enough time in this current cycle to see these challengers go into the mainstream and innovate there. I don’t think the challengers have provided that much innovation; they have fed a little bit off the soft underbelly of the mainstream market. Most of the innovation has come from the lenders that sit over the challengers.
What factors are holding back challenger banks in the specialist market?
Whittaker: The problem for the challenger banks is they don’t have the scale yet to disturb the big lenders because, if they have only 1 per cent each of the total market, that isn’t going to worry one of the super-lenders that is edging towards 20 per cent. I’m no fan of Mr Osborne’s tax announce-ments but to hit the small lenders with an 8 per cent surcharge is just puerile. It limits their capital-raising powers because their shareholders have a more limited appetite for pouring money into them. And those organisations, while they can make noise around the boundaries, they can’t really get into it because they haven’t got the scalability.
Reynolds: Areas like self-employed and lending into retirement are actually big, big markets. So do the specialist lenders have the appetite to do the volume that will actually move that market? What they do is great but I think there is a big gap in the middle between the specialists at the bottom and the high street at the top.
Sinclair: Part of this comes back to the increased impact of regulation and all its types. Lenders need to have a credit policy, and rules about what they do and don’t do. If you sanction something outside policy, it has to go in a report that then goes to the regulator. In days before, it would still have been a sensible lending decision; but today, because of the fear factor that sits inside organisations, it is much more difficult for people to be flexible. It might look pretty sensible but the process that has to be gone through to allow it to complete is really hard work.
To set up as a lender, you have to go through a massively bureaucratic process that says: ‘This is who we are, this is what we do, and we can prove it.’ Certain lenders are happy to step outside their published policies for the right cases, and they will trust you to place that business with them. What that comes back down to is that this is a people business rather than a policy business.
Bailey: When lenders come in and try to raise funds, there are all sorts of caveats around that. Lenders are restricted by what their funders tell them they can do. We have a luxury position in that we can look outside the criteria for common-sense lending decisions because we have a lot of our own capital in there. We also have funders that understand how we work.
In 12 months’ time, what will be the state of the specialist lending market?
Reynolds: The bit I’ll be interested in is where bridging and secured loans are, post-Mortgage Credit Directive. I think that’s the bit where we will see the most change, both in behaviour and in how distributors work.
Bailey: For many years, second charge lenders and brokers have tried to educate first charge lenders and brokers that there was another alternative to simple remortgages and it might be a better product for the customer. This is probably what will open up that opportunity for those products to be looked at side by side. The difficulty is, will the second charge mortgage market move quickly enough? There’s going to be wholesale change, and will that education come quickly enough? Will there be a big shift of second mortgages going to first mortgages? That’s another option.
But it’s also driven by distribution. Some lenders will go to networks and try to deal with them directly. I think it will take another 12 months for the seconds market to really bed down. The whole model is going to change, the fee charging will change. My prediction on the bridging market is that it will grow by £1bn a year for the next five years. A quarter of a billion of that will be in the residential first charge market.
Jupp: I don’t share the bullish view that it will grow by £1bn a year. I think the big issue in the next 12 months is that it opens an opportunity to brokers. For the good broker firms, it is an opportunity for them to become a genuine expert in all areas of mortgage provision.
But the concern I have is that most networks will authorise most of their RIs to do most product areas, including regulated bridging. We get transactions across our bridging desk every day where the conversation lasts no more than 30 seconds. That conversation is just: ‘Your client should not consider this, it is an inappropriate solution for that customer.’ It does concern me that, in the era of decent marketing, some brokers are seduced by the colour of a lie and an opportunity without doing a proper job of research and analysis. The MCD will open up the market, but it might open it to people who don’t know enough about the products to do a proper job.
How will the distribution landscape look in the future?
Reynolds: I think the market that the lenders are after is the remortgage market. The purchase market will very much be pushed towards the intermediary because of the complexity of it. The challenge we have is making sure the clients are aware – is a remortgage really what they want? Once they start saying ‘Can I extend the terms?’ then they’re back into advice, which negates that model. But that’s the area that lenders will probably target because it seems to be the area you can automate most easily. The other challenge is the disturbers that Rob mentioned. Is there someone out there we’ve never heard of that will come into this market and do something none of us have ever thought about?
Whittaker: The big boys and girls haven’t got a cat’s chance in Hades of changing their technology. If they lift the bonnet and tinker with it, on their backbooks, it will destroy everything they stand for. So if they can’t deliver it in the existing space, where we’ve all been crying out for change and improvement…. Technology with lenders in this country is a disaster. The small and medium-sized lenders are much more fleet of foot. We can turn on a sixpence in a morning; a big lender is a supertanker.
Sinclair: I think some lenders will want to play in that ‘It’s mine’ space. Others will look at their distribution and say 70 per cent of their business comes from intermediaries so do they really want to annoy them? So they will make much more pragmatic decisions based on being in a partnership rather than a competition. I think we will see that debate become quite powerful in the next few years. First-time buyers will not go direct.