Having examined decision processes, credit reporting, property valuation and the talent pool as important areas where the UK and US non-conforming markets differ (Mortgage Strategy November 3) I will now focus on the remaining four, the most important of which I leave to last – regulation.
Product offering Over the past 35 years, the US industry has developed a vast array of products, many of which are based on long-term, fixed rate (typically 30-year) agreements. The emerging UK market has, in contrast, a somewhat narrower selection of products as would be expected but has benefited from the US experience in the way it has developed its portfolio. However, the UK model does not include similar extended term fixed rate products – this is unheard of in the UK and it is unlikely that you will be moving in that direction in the near future.
Technology Within non-conforming sectors the level of automation and technology applied by lenders to the business would appear to be significantly more advanced in the US than the UK, likely a function of the sector's maturity.
Government incentives Some of the US sector's growth can be attributed to the fact that mortgages in the US are one of the last remaining middle class tax reliefs, with borrowers in most circumstances deducting 100% their mortgage loan interest from their taxes. It is also not uncommon for US borrowers to consolidate their loans – bank overdraft, credit cards etc – into a home equity loan as it is 100% tax deductible. This is not the case in the UK.
Regulation The US market is heavily regulated, perhaps to an extreme. This is the case across the entire mortgage market with no distinction between the prime and sub-prime sectors.
However, although regulation is viewed apprehensively by the UK industry, in the US it has always been there and now plays an important role in ensuring that the industry is credible and trustworthy.
As regulation of the industry is such a hot topic in the UK at the moment it is worth looking at the impact of regulation on the US market in more depth.
Over the past five years there have been a number of US non-conforming lenders that have been found guilty of predatory lending – where a lender preys on people that are more susceptible to being influenced. Although not precisely defined, predatory lending encompasses a series of unfair credit practices including excessive fee charging and falsifying documentation.
Previously distinguished companies such as Associates Mortgage Company, formerly one of the largest nonconforming mortgage originators in the US (now acquired and consolidated into CitiFinancial, a subsidiary of Citigroup) were found guilty of such practices. Predatory lending became such a big issue that US Congressmen became involved with an eye to their own constituencies. As a result they started enacting regulatory restrictions that varied from city to city.
This regulatory situation rapidly spiralled out of control with the industry moving away from a national standard. This has had a dramatic affect locally with mortgage lenders forced to close operations in certain cities because they could not operate profitably. The regulatory restrictions applied by the local governments were just too tough. This led to further consolidation within the market.
Similarly, in the early days of the UK market there were some companies doing business in such a manner as to attract regulatory intervention – as well as adverse attention from the media which no doubt influenced an increased regulatory focus on the UK non-conforming market.
Most non-conforming mortgage lenders in the UK are adhering to the voluntary Mortgage Code as though the industry was in fact regulated. Companies within this sector are taking a responsible approach to lending and not inviting regulatory oversight of a predatory lending nature.
Overall, the UK market is faced with three main challenges: regulation, the effect of a true economic cycle and the entrance of mainstream lenders. As an industry, we need to look at regulation as a positive move but must also commit to ensuring that the industry works in a way that does not warrant further regulation.
When the economy goes through an adverse cycle – hints of which are now apparent in the UK – there is an opportunity for the sub-prime market to grow, as individuals tend to take on more non-conforming attributes. And as mainstream lenders who have been dabbling in the market over the past couple of years become bolder in their forays into the non-conforming market, the sector will become increasingly rate-sensitive, particularly at what we term the 'near prime' product level.
Our collective ability within the sector to withstand mainstream challenges by not compromising our reasonable risk/reward formula will serve the long-term interests of the non-conforming sector well.