The most obvious result of the market collapse in 2008 has been the evaporation of adverse products for consumers with a poor credit history. But while sub-prime products for would-be borrowers with months of arrears and numerous County Court Judgements has yet to return, there are deals available for those who have had a few blips over the past two years but can prove they’ve got their finances and their credit history back on track.
But take-up has been low. So to find out what borrowers feel about the near-prime sector, Precise Mortgages employed YouGov to interview 2,113 mortgage borrowers, which revealed that only 33% are confident of getting a mortgage in the next 12 months and one in 10 believe their credit record will stop them getting a mortgage. Mortgage Strategy also conducted its own research among brokers, which revealed 60% are unaware they have credit problems.
We brought key representatives of the industry together to discuss the results and where the future for this niche sector lies.
POST-CREDIT CRUNCH, ARE CONSUMERS MORE AWARE OF THEIR CREDIT SCORES NOW?
Tony Salentino: The most common question we get asked is whether we can carry out a credit search. The reason we are asked is because there is a lack of awareness from a consumer perspective.
Ian McPherson: We’re trying to educate brokers to make clients get their own credit report from CreditExpert, a division of Experian, from which they can get a credit report for free provided they cancel the subscription within 30 days. There’s a lot of education required.
Dale Jannels: Brokers don’t want clients coming to them claiming they have clean credit and then applying to Halifax, Nationwide and Santander only to be rejected by all three. Potentially there could be two County Court Judgements, three defaults and a missed mortgage payment that the client says they forgot about or didn’t think were important.
Brokers are finding that a credit report undertaken at the outset saves them time and hassle. It only works if lenders share information because, for example, one recently revealed it doesn’t declare overdraft facilities to credit agencies. This means lenders can still see it but the credit reports don’t show it so it can cause confusion.
Salentino: We’re encouraging brokers to get identity and money laundering checks, and credit searches as part of the knowing your customer process. There are systems where you can go online and produce a report that a customer can understand with an automated valuation model, money laundering and electronic IDs. The broker market has to change and do simple checks much better.
McPherson: You need to be in front of clients to inspire them to do a credit search there and then. If you do it over the phone there’s going to be a week’s delay and you may have lost that client. In the old days there were facilities where brokers and packagers were able to do it more quickly in-house, subject to clients agreeing.
Dev Malle: Brokers normally take what clients say at face value but Mortgage Strategy’s near-prime poll shows 60% of people don’t know they have credit problems. If brokers only take clients through their normal process they might miss out on near-prime customers.
Also, the title near-prime can be confusing as to whether it is historic or current adverse. There are various categories and there is confusion regarding whether it’s a product category or one that is built to repair someone’s credit status. It is purposefully ambiguous and designed to capture as many borrowers as possible, but there is a danger that it could end up with several titles.
McPherson: Do we need to have a title? Can we not just have mortgages with different criteria? Clients don’t like being told they are near-prime and in the old days they didn’t like to be told they were non-conforming or sub-prime.
Rob Killeen: There are lots of facilities for credit scoring that brokers don’t know about. Even if it’s on the telephone you can send clients an email with a link they can use to produce a report. The report can be sent to brokers so they have a summary, but brokers aren’t aware of that.
Ian Balfour: We have amended our Initial Disclosure Document to say that only if there is full disclosure will we refund the fee. We had a couple of cases where we had to refund fees because we could not get them a lending decision. There is an issue about whether customers can disclose something they don’t know about but it costs us when we discover these near-prime issues such as missed bill payments.
I’m not an expert on what near-prime is as it includes everything from CCJs and bankruptcy to a missed payment on a phone bill.
IS THERE ANY CATEGORY OF NEAR-PRIME BORROWER THAT SHOULD NOT BE ABLE TO GET A MORTGAGE?
Malle: There is concern from brokers about the regulatory perspective on this area. Clearly, there are going to be categories as part of Treating Customers Fairly principles, prudent lending and the Mortgage Market Review’s affordability criteria, where borrowers shouldn’t be able to get a mortgage.
Cammy Amaira: There are always going to be some cases where a certain amount of arrears will rule the customer out of a mortgage.
Salentino: There are irresponsible borrowers such as the regular remortgager who is consolidating every two or three years. There is nothing wrong with this but if their balance is going up it could be an issue. In the past few years we’ve been too relaxed about checking affordability in areas such as self-cert so brokers and lenders have played their part in allowing it to happen.
We have to learn from it and it means there are some people who shouldn’t be borrowing. In that case, it is the right advice to tell the clients that they need to do something different and can’t keep borrowing themselves out of the problem.
Balfour: We have to be careful with this because it is easy to be flippant. We have to remember that the government, regulators and the press have put a huge number of people into the mortgage market who shouldn’t be there. Now, they have had the floor taken from beneath them and left on their own. We need to ensure lenders, government and regulators don’t leave these people isolated.
Malle: There is definitely a hostage situation with existing borrowers. Sometimes it seems implied that we’re talking about new borrowers when it’s not always the case. From a TCF perspective there’s a responsibility to ensure borrowers are in the best possible place. How far that extends to forcing lenders to expand criteria to accommodate them is a risk appetite issue.
Based on Mortgage Strategy’s near-prime poll, 82% of borrowers say it is poor financial management that got them into adverse credit. I can understand divorce, redundancy and illness as unforeseen causes but poor financial management says people should not be borrowing further money.
Alan Cleary: Near-prime lenders don’t accept every borrower who comes to them. On our affordability checks we stress test the reversion rate the highest rate they could pay by an extra 2% to take into account future base rate rises. We judge affordability on that so we know we’ve done as much as we can without getting ridiculous. We verify income 100% of the time, which not one of the big six banks do, so we know the income is real and affordability is strong. If they pass all our other hurdles they are good borrowers but we do decline some.
Salentino: Good financial advisers will notice if a client is not managing their situation properly. In the lending market it is a case of knowing your customers and in 2007 we told the Council of Mortgage Lenders’ conference that something needed to be done. We always did an automated valuation model, credit search and ID check to give lenders. Packagers can add value to lenders’ decision-making.
WHAT DO YOU THINK OF REPORTS that BANKS AND PERFORMING CREDIT SEARCHES ON EXISTING BORROWERS AND CONTACTING THEM IF THEY BELIEVE THEY ARE OVER-COMMITTING THEMSELVES?
McPherson: It was reported that some banks were contacting customers and suggesting ways they could spend less if they can’t afford their mortgage payments. They are asking whether it is right to have Sky television and gym membership when they are struggling to pay their mortgage bills. You can’t help but think there is some logic here because if 82% of people have poorly managed their finances then pre-emptive calls from lenders asking how they can help is sensible. The message needs to be conveyed as a suggestion to help rather than a demand but it seems like a good idea.
Cleary: It sounds sensible for a lender to be doing this. Credit card firms and unsecured lenders are doing far worse. There are stories from these companies asking lenders to pay credit card bills before their mortgage payments.
IS IT RIGHT FOR A BORROWER WHO HAS BEEN CATEGORISED AS NEAR-PRIME TO ALWAYS STAY ON A HIGHER RATE?
Salentino: With near-prime if you are prepared to make exceptions on criteria then you have to price for that. Years ago you had credit repair products that said if clients have 12 or 24 months without arrears they could come off of that rate and move to a mainstream product. There could be a good argument that if clients have proved themselves they should be able to move to a mainstream lower rate.
Malle: The take-up on those products was low and one of the reasons was that the sourcing systems couldn’t cope. We have to take some responsibility as brokers because clients wanted upfront low rates so we went for the quick hit even with overhangs. The critical bit was that those products were under-utilised because they weren’t showing on sourcing systems or clients wanted a low rate.
Balfour: I remember when you could go to your local building society, explain your credit issues and ask the lender to put an extra 0.5% on the deal. That’s pricing for risk and they were prepared to take that risk. If we can demonstrate that we are not only getting them a good rate but that we are incentivising clients to benefit at the end of it, it might work again.
HOW DIFFICULT IS IT TO PLACE NEAR-PRIME DEALS AND IS IT GETTING EASIER?
Jannels: There is huge demand considering the amount of redundancies in the past few years and lenders are recognising that, so there is more choice. The criteria is more relaxed than it has been and we’re getting more cases through. If you’ve got the situation where someone has arrears, CCJs or credit card bills you have the obstacle of credit scoring. If the credit score is low then the mortgage is likely to be declined, whether it is high street or near-prime lenders. So we have to find other lenders that are not credit scoring but manually underwriting. They need to look at the client’s whole situation rather than just credit scores and missed payments.
Killeen: The big issue is not just looking at financial mismanagement in the short term, considering the recession of the past few years, but the longer term. There is also a difference between pound for pound borrowing where people want to move on to a lower rate.
This can often increase affordability and is in line with TCF principles. But where borrowers are constantly refinancing and borrowing that could be a problem.
Malle: It’s getting easier to place near-prime cases. Aggressive competition in the prime arena means lenders are looking elsewhere to get better margins than in the sub-60% LTV prime area. Some of them are opening up criteria but it is only going to get that much easier until we have big players entering this space to push the boundaries. The reason big players aren’t is because we have a £130bn market and there are risks regarding reputation. While the regulator sits on the fence there is not going to be a major shift into near-prime.
HOW IMPORTANT IS IT FOR LENDERS TO HAVE MANUAL UNDERWRITING?
Killeen: Automated systems don’t help lenders, brokers or clients as it is the computer that says no. If someone looked at the case over the long term rather than simply the last two years there is a far better chance of getting the deal through as lenders can be confident it will be good in the long term.
Cleary: There has been clever marketing by some of my peers that has confused the issue between lending policy and credit scoring. Making it necessary for borrowers to be on the electoral roll is lending policy and has nothing to do with the credit score. Lending policy and credit scoring are two separate things so let’s not confuse them. Our credit score is designed for near-prime borrowers so it is different from a prime credit score.
We can do manual underwriting but that’s going to take more time whereas I can give a decision in eight minutes. From the time you submit the case I will tell you yes or no within eight minutes and 65% to 70% of those clients are successful based on current experience. For those who don’t fit any mould manual underwriting might be better, but even so the underwriter is only going to police lenders’ policies. We should use credit scoring when it suits the client and when it doesn’t there are lenders that don’t credit score, which is good for the market.
Salentino: Credit scoring does have value but I would like to see lenders using it as part of their decision-making process. If Precise is approving 70% of people then some of those 30% who are rejected could be approved manually.
We recently had an event with lenders that don’t use credit scoring, although some used it as part of their lending process, and it is probably the most receptive broker audience I’ve seen because they realised they could speak to someone. I remember when you could speak to lenders and explain why clients wouldn’t fit criteria.
Brokers could ask the underwriter to have a look at the case because the borrower was still good.
Cleary: You’re barking up the wrong tree if you think all lenders are going to drop credit scoring. The big six banks have been using credit scoring for 40 years. I’ve worked for at least one of them and it isn’t going to change.
It does what they want it to. It’s quick, you get a consistent answer every time irrespective of whether someone is having a bad day or on holiday.
If borrowers pay their bills they get a good score. If they don’t they get bad scores. It filters out those who are most likely to pay their mortgage based on previous history.
I don’t argue against lenders that underwrite manually as it gives brokers more options. If you can’t get a client through the high street then you can go to near-prime specialists. From a broker perspective it is about income versus effort as there is no point spending lots of time on a case that won’t pay. If you make a decision quickly it helps brokers and clients.
Jannels: Customers want to know why they are being rejected and on the high street all they are getting is a failed credit score. There is no understanding about why they failed.
DO YOU THINK THAT THERE IA A STIGMA AROUND NEAR-PRIME DEALS?
Cleary: The market is jumping at shadows. We’re well placed to talk about regulation because we got authorised as a near-prime lender in the middle of the market turmoil.
We went to the Financial Services Authority with our policy and pricing. My colleagues and I had several meetings and it appears it has no problem with sub-prime or near-prime.
What it doesn’t want is toxic lending because in the last market it was risk layered on risk. Lenders were taking CCJs with defaults and arrears and while each was fine on their own, together it created layers of risk.
The regulator hasn’t got an issue with this sector but it would if it went silly like before. And it’s going to be a long time before that happens because we’ve got long memories so the regulator isn’t going to ask for bigger licences.
The FSA says it will intervene in product decisions if it feels there is detriment to customers. If I was doing self-cert for heavy adverse at 90% LTV it would have something to say.
The type of lending now being done is income-verified, affordability is checked and the adverse is near-prime. It doesn’t have a problem with that because we’re doing it and we talk to the FSA every month.
Malle: One of the problems that is attached to near-prime could be because there’s a higher proc fee. Regulators want to prevent toxic lending and lenders want to manage their margins.
For brokers it’s about income and effort and for clients it’s about repairing their status or keeping their home. You could marry them up but pay non-prime proc fees on the drip as trail commission while that product is prepared.
Cleary: I’d be open to paying on the drip but I’m not sure that’s what the market wants.
Killeen: It is a decent suggestion but I’m not with it. Is the prime driver of a case income or effort? My gut feeling is that effort is the key element. We don’t want to risk a second decline so let’s go to someone with the best chance of getting through.