For the past two years nearly every article on self-certification has begun with a reference to the BBC’s The Money Programme. This is now annoying many in the mortgage market, not because the industry has been complacent about the impact of the programme but because that chapter is now closed and the product is entering a new stage in its life.It is maturing and products checks and criteria have changed. Lenders continue to monitor and challenge themselves on their lending practices, while brokers challenge themselves on the advice process. The regulator is also diligently carrying out its role – something supported by the news suggesting a fresh probe into the market (Mortgage Strategy September 19). The Financial Services Authority originally looked into self-cert in November 2003. Its review examined the risk of financial crime arising through the mortgage application process. The FSA found existing lender controls were adequate while reiterating that stating a false income is a crime. Mortgage Strategy reported that this latest review aims to find out what changes lenders have instigated to their systems and controls in relation to self-certified and fast-track lending in the past 18 months, and to discover their views on developments in the sector. Most lenders have succeeded in refining controls while retaining the integrity of products. More sampling of product cases, clearer declarations on self-cert forms and statutory regulation have ensured a robust market. And the arrears performance of self-cert continues to give lenders confidence. One issue for the market has been that self-cert has enjoyed its most successful period during some of the lowest base rates in history, and in a time of low unemployment and low inflation. Critics say self-cert has yet to prove itself through a full economic cycle. But as the market descends from the highs of last year, self-cert continues to outperform many standard products and is beginning to convert sceptics. Record keeping requirements and a clearer advice process mean brokers are more confident advising on self-cert. In an environment where mortgage approvals for mainstream cases are declining, brokers are beginning to take advantage of the additional opportunity self-cert provides. Consumer awareness of self-cert has also increased due to press coverage. This has opened up the product to more people but has also made consumers more aware of the implications of inflating their incomes. But it is important to remember what an Faverage self-cert borrower looks like. They are 38 years old with a salary of 40,000. The market is driven by self-employed people – some involuntarily self-employed after being made redundant. About 14% of the population is self-employed and in the next 10 years there could be 3.2 million people in this position. The past two years has seen some aggressive questioning regarding PAYE self-cert. But there are numerous reasons why self-cert is required in this area. Many borrowers have more than one job, some are in commission-based employment and a significant proportion are taking part in a bonus scheme not included as salary. For example, management consultant Matthew Unwin has several business interests and sources of income. Self-cert enabled him to reflect this in his mortgage application. Unwin and his wife chose a fixed rate product and received an 85% LTV offer. He was delighted to discover how the market has changed in recent years, particularly how it has developed to meet the needs of modern borrowers. At the other end of the scale Louise Turner, a divorced mother of two, has also benefited. She says a self-cert mortgage was right for her because her income is made up of her part-time salary, working families tax credit and maintenance payments. Recognising these types of circumstances, mainstream lenders have been entering the market. In 2001 there were about 15 lenders in the self-cert market. Conservative estimates suggest this figure has increased by a third. It seems not a day goes by in the specialist market without a mainstream player entering. Alliance & Leicester is entering buy-to-let in 2006 while West Bromwich has moved into sub-prime. This has put downward pressure on price. In turn, margins are being squeezed and the difference between a self-cert rate and a mainstream rate can be a few basis points. The self-cert market is price driven and products have become cheaper to attract sophisticated self-cert customers. The emphasis on price is more obvious than ever but so is product choice. Lenders are offering products with features such as free legals. Self-cert borrowers appreciate these but they are not a greater pull than the leading price. Lenders are keen to make sure they offer competitive prices. In the current market there is a clear emphasis on fixed rates. BM Solutions launched a self-cert fixed rate product on the market in July at 4.85%. This was a fix for two years with no extended early repayment charges – a reflection of how aggressive the self-cert market has become. The mix between fixed, discounted and tracker products changes from month to month but there are a number of factors behind the popularity of fixed rates. These include consumers wanting to maintain even payments and changes in the money markets that have allowed lenders to buy money cheaper. This is a positive trend. But whenever there is a speculation regarding an interest rate cut, consumer attitudes change. The price led nature of this market means there is a healthy remortgage market. The focus is on retention and net lending performance for most lenders. Savvy self-cert borrowers due to remortgage are increasingly getting on the phone to their existing lender and asking to be moved to a better product. The prevalence of so-called hero products also seems to have increased with the introduction of market- leading products that attract press attention and lead to massive volumes in short spaces of time. This can lead to service problems and those lenders who haven’t invested in online technology can be left to rue the fact. Technology has undoubtedly played a significant role in the growth of self-cert. According to BM Solutions, 94% of the intermediary market conducts business online, with the average proportion of cases processed trebling since March 2003. More than six out of 10 intermediaries have been submitting cases online for more than a year and 73% plan to make further investments in IT. Speed and efficiency is of the essence and brokers continue to come under pressure from consumers to deliver everything instantly. Borrowers can now secure an online virtual mortgage offer within minutes. And it will not be long before every adviser will be able to go to a client’s home with a laptop and submit an application there and then, without having to hook up to a phone line. It is clear the self-cert market now has a solid place in the mortgage industry. Specialist lending has caught the social and demographic changes in the country and self-cert has played its part in this to the full. Many pundits believe self-cert is at risk of being eroded by fast-track lending but this is simply a streamlined application process for borrowers with an established record looking for around 75% LTV. Many self-cert borrowers cannot fulfil these criteria and so represent a separate audience. The fact remains that self-cert is only 6% of overall mortgage balances and remains very much a niche product. With an ever-increasing number of lenders servicing the self-cert market there is an extremely positive outlook for advisers and their clients. Products, service and technology in the self-cert market are combining to bring credibility to this part of the specialist market. So let’s focus on the future of this product. The profile of self-cert should change and it deserves recognition for enabling genuine borrowers to secure a property. Sustainable home ownership is one of the main goals of the economy. It’s about time self-cert got some of the credit for helping to make this dream come true. Matt Grayson is public relations manager at BM Solutions
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