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Fees now need a level playing field

Much has been written about the growth in sub-prime lending, particularly the number of new entrants and consolidation activity in the market. Increasingly, we are seeing lenders in this market receiving the backing of their bigger, mainstream cousins. And, of course, we are seeing higher-profile entrants into the market from lenders with a good heritage and trusted brand, such as Bristol & West and Birmingham Midshires.

Many lenders either already have, or are certainly intending to, enter the market in the short to medium term. One question they may well be asking themselves is: “Will acquisition or organic growth deliver the best return?”

Acquisitions in the sub-prime sector tend to command absurdly high premiums in exchange for the higher margins that can be earned. But take a look at the market leaders, whose heritage is entrenched in sub-prime – they have all grown organically. The common thread running through all of these operations is the expertise of the people they employ. They know the market and have a keen understanding of the risks and the inherent balance of pricing. Success in sub-prime centres around people skills and sustainable organic growth. It may take a little longer to &#39get going&#39 but, in the long term, offers a business model that is underpinned by strength.

The business case for the high-profile entrants with trusted brands is clear. In the case of Birmingham Midshires, we relaunched in the intermediary market as the &#39specialist lender of the Halifax&#39 under the brand BM Solutions. Since then the vast majority of our business is now writing specialist mortgages – buy-to-let, self-certification or sub-prime. This is a fine achievement for a business that, less than 18 months ago, was &#39just another lender&#39. Today, Birmingham Midshires is widely recognised as one of the UK&#39s foremost specialist lenders.

Placing a sub-prime client is a complex business for the mortgage intermediary and good-quality support is often required. This is a void in the intermediary market traditionally filled by the packager, which can often field its own staff to help intermediaries find a solution for their clients. Packagers place some 90% of sub-prime cases, with some demanding what could be called exorbitant fees. This is not in the best interests of our reputation as a lender, the intermediary giving best advice nor the borrower who bears the full cost. In fact, it disadvantages the borrower, a pill I find particularly bitter to swallow when we should be helping people to get back into the housing market, not penalising them for their past.

BM Solutions supports full disclosure of the procuration fee and, indeed, any other fees to the borrower. What we do not support is inflated fees earned to the detriment of the borrower that are shrouded from public view. This practice must be stamped out and a level playing field established in terms of packaging and procuration fee disclosure – an area that the forthcoming mortgage regulation is expected to target.

Earlier this year BM Solutions reduced our packager panel to a number that would enable us to form stronger alliances with the leading brands in the marketplace. BM Solutions remains 100% supportive of packagers and believes that they remain an important part of the mortgage market. This move simply means we are able to offer a more focussed, quality service through a select band of the premier packagers in the market.

Earlier this year BM Solutions also announced the launch of a dedicated sub-prime helpdesk at our National Mortgage Centre. This is just one of the many developments BM Solutions has already rolled out to help intermediaries writing sub-prime business present their own clients with the best possible offering. In short, BM Solutions aims to be front of mind with brokers looking for a solid specialist-mortgage range that offers good value to their clients. We want to build long-term relationships with intermediaries so that they, in turn, can do the same with their own clients.

BM Solutions has two particular features in its sub-prime product range that have clear and tangible benefits for your clients. These features underpin our solid belief that the sub-prime market will continue to develop with two key values in mind – fairness and transparency. Firstly, every product option reverts to SVR or the Bank of England base rate. This is a clear and transparent mechanism with which

to track a mortgage. Arguably, this is exactly how every product aimed at people who have faced financial difficulty in the past should be. While there is undoubtedly a broad mix of people who fall into the so-called sub-prime category, from those who have been victims of circumstance to those who have previously suffered from poor management of their finances. With the latter particularly in mind, how can we expect them to improve their situation when nonsensical terms such as LIBOR are introduced. Outside of this industry, how much meaning does this have to people? Not a lot I would wager, and how easy is it to access LIBOR rates unless you read the FT or have a detailed knowledge of how the money markets work?

A mandatory requirement of any borrower arranging a sub-prime mortgage with BM Solutions is a home visit from a debt counsellor. All borrowers who apply for a &#39non-standard&#39 mortgage with Birmingham Midshires will receive a visit from a specialist consultant for advice and guidance on managing their mortgage. It is important that borrowers who have had difficulties in the past can see the light at the end of the tunnel and are given a fair chance. But it is more than simply offering a loan at a more favourable rate than other lenders in the market. We will be working with borrowers to help them overcome their previous difficulties and equip them with the tools and knowledge for a firmer financial footing.

These values and characteristics are being &#39championed&#39 by those lenders who have a known heritage, trusted brand and resources to make things happen. As the market continues to develop, do not be surprised to see the dynamics of distribution change as the new sub-prime &#39super brands&#39 flourish.

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