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Through a looking glass, darkly

It’s fair to say that the specialist lending sector is unrecognisable compared with a year ago.

As the credit crunch bit, confidence in the quality of many specialist lenders’ books quickly eroded, resulting in the obliteration of funding lines.

Buy-to-let, self-cert, or sub-prime clients who previously had their pick of an abundance of products now have slim pickings, with many established lenders having left the market or temporarily closed to new business.

Let’s make no bones about it, this is a fundamental shift in the market landscape and whatever may be said in terms of a return to normal, it is highly unlikely we will ever again see a market like that before the crunch.

This is no bad thing given that, dare I say the word, prudent lending practices in that time seemed to have been thrown out of the window by many in the rush to secure volume. I recall the days of competitor analysis when we would look aghast at the risks some lenders were prepared to take. It’s not surprising that those lenders no longer feature in the marketplace.

So what now for specialist lenders eyeing up the mortgage space?

Well, there are still many challenges to overcome. First, where is the funding? With the securitisation market all but dried up, clients who do not have access to deposits from parents or benefactors will fall at the first hurdle.

Second, the Bank of England’s Special Liquidity Scheme still excludes lenders that do not take deposits – a significant proportion of the market. The Intermediary Mortgage Lenders Association has been particularly vociferous in its calls to allow intermediary lenders to access the scheme, but such a move does not seem to be on the cards.

Essentially, there is no level playing field among lenders, and one must wonder how the BoE would open up the SLS anyway. Would it be as simple as allowing all lenders to access the scheme or would the Bank look to broaden the range of asset classes it is willing to accept? Currently, only AAA-rated mortgages are acceptable to the Bank – would it be prepared to move to AA or A-rated loans?

These questions seem almost irrelevant at the moment, given that the Bank looks unlikely to make any extension so a significant number of lenders will be unable to re-enter the market. Again, this may be no bad thing. For those that still have the means to move back into the market – CHL among them – there has to be a lot of scrutiny of the way lending was previously conducted and how it might work in the future, before any return is possible.

To my mind, the core values of good lending were lost in the old, crazy days. For some, quality all but went out of the window as they scrambled up the risk curve seemingly happy to take on any type of borrower regardless of their ability to pay.

Many pushed their claims for business on the back of high-end technology which promised to accept and complete with minimal intervention. Don’t get me wrong, there is a place for automated underwriting and online submission but there must also be checks and balances. Manual oversight of business submitted must be robust enough to take out deals that ring alarm bells. How many borrowers currently sit on lender’s books having secured their loans through manipulation of the underwriting process? It’s no wonder we are seeing steady rises in arrears and repossessions.

The so-called flight to quality is real and must be taken seriously if we are to learn from the mistakes of the past. Risk, which seemed an alien concept to some, must be a big consideration and lenders will have to be more discerning about who they conduct business with and accept onto their books. This means that brokers and distributors are no longer in the box seat when it comes to product access. Where once some were able to bully and cajole lenders into a relationship, now lenders will be looking for something much more mutually beneficial.

For us, as an intermediary-only lender, our distribution model will change. When we return to the market in the near future we will limit our lending to distributors that have historically worked with us, rather than against us.

We want to work in partnership in areas such as product design and criteria, and will only lend through those that can deliver the quality of lending we wish to see on our books. Most lenders will not be open to all, so brokers and distributors will have to think seriously about the relationships they have and whether these will ensure them access to the products they need.

One attribute all lenders will need is experience. The following is not an ageist question but it must be asked – how many of the lenders that have fallen during the crunch were able to rely on management-level people with experience of working through the last recession? The answer is very few.

It is difficult to plan for dark days if you have never worked through them before. All lenders need a management team with the experience to acknowledge there is sunshine and rain, and given that sunshine will not last forever it might be an idea to keep an umbrella handy.

In the current climate, it will do lenders no good to look too far into the future. A week may be a long time in politics but in financial circles at present, a day can change everything.

The mad month of September 2008 will long be remembered for bank collapses, interventionist measures and global uncertainty. This may be seen as the beginning of the end but at present it is impossible to say. So working on five-year plans is futile – it is the present and the short term we should be focusing on. Adopting this type of thinking will give lenders a clearer idea of their next steps and put them in control at a time when control is in short supply.

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