People in the UK are now 1trillion in debt and interestingly 80% of that is secured against homes as mortgages and remortgages. It’s not surprising then that Datamonitor is forecasting a steady rise in the non-standard mortgage market (which includes sub-prime) from 36bn last year to 47.6bn by 2010.
But how does Scotland fit into this picture? The consumer debt crisis seems to be more acute north of the border. A paper published by the Scottish National Party last January says Scots are the most indebted people in the UK, with 61% likely to pay for Christmas on credit. It’s easy to see why there’s potential for growth in sub-prime.
“Sub-prime is growing at a notable rate,” says Craig Arthur, principal of Glasgow-based packager and broker Concorde Mortgages. “I’d say 80% of our sub-prime business is almost prime now but I believe by this time next year we’ll be seeing a lot more heavy adverse.”
Similarly, Robert Stevenson, an adviser with Stirling-based brokerage Collin & Co, sees a link between consumer debt and sub prime growth.
“We’re getting more referrals from agencies such as Citizens Advice Scotland asking us to help with mortgage-related problems,” he says.
So in the face of this rising demand, how well is our industry serving the Scottish sub-prime marketplace?
Not well, it seems. Lenders don’t always make it easy for brokers to get the best deals.
“Once we know which mainstream names have declined an application we can often try the case with another mainstream lender,” says Stevenson. “The difficulty arises because lender scorecards can change daily. You can get an unexpected knock-back from a lender simply because a credit card payment was made a few days late, which is silly. We manage to get about 40% of cases placed in the mainstream, with the remainder going into sub-prime.’
Bill Thomson, director of packagers Exclusive Connections Scotland, cites a lack of lender understanding of the Scottish marketplace as a potential barrier to sub-prime growth in Scotland.
“Take minimum loans – 50,000 may seem sensible in southern England but in some parts of Scotland it’s too high,” he says.
Arthur agrees that some lenders are out of touch with Scottish reality. “Often clients in this sector will be looking at ex-local authority houses or low-rise flats, yet many lenders won’t accept these,” he says. “This needs a rethink, if only because these homes are usually better built than their English equivalents.”
Thomson has seen similar difficulties. “It’s ridiculous that a lender sets a 120,000 minimum loan on an ex-local authority flat – it’s a way of saying it is not interested,” he says.
And he cites properties located above commercial premises as another sticking point. “There are some fine affordable properties of this kind in Glasgow, Edinburgh and other major Scottish cities yet you’re restricted in securing sub-prime mortgages on them,” he says. “It’s frustrating. But luckily some new entrants will take a view on some of these.”
Arthur considers LTVs another hurdle. “Lenders have to understand that house price growth in Scotland is steadier than in the south-east of England. If a client remortgages and can only get a maximum of 80% LTV they may not be able to consolidate enough to make the deal viable. We need higher sub-prime LTVs.”
Complicating the issue is the fact that many lenders fail to understand the nuances of Scottish law. “Some lenders seem unwilling to grasp the differences,” says Thomson. “For example, lenders are happy to accept individual voluntary arrangements but they don’t all accept the Scottish equivalent – Trust Deeds – which to all intents and purposes are the same thing. The same could be said of sequestration which is the Scottish equivalent of bankruptcy.”
Thomson’s message to lenders is clear. “Lack of understanding with some lenders causes us problems,” he says. “Please try to get beyond your South-East England bias and look again at your credit and risk.
“Let us show you round the Scottish market and help you understand its realities. Then go home and rethink your criteria so we can deliver a more accommodating service to our growing number of sub-prime clients.”
But it’s not only lenders that need to reassess their attitude to sub-prime in Scotland.
According to Dougie Wilson, director of Edinburgh-based Niche Financial Services, brokers must take a fresh look at clients’ needs.
“There’s an section of brokers in Edinburgh that looks down its nose at sub-prime,” he says. “These people are time-locked into a traditional market and often react with a ‘we didn’t know you could do that’ when we tell them how easily we can place most cases.”
Arthur agrees and says he sees this problem across Scotland. “I find it particularly with IFAs who are more used to dealing with wealthy individuals than people with credit problems,” he says. “Some IFAs still think all sub-prime lenders are back street operators.”
The Financial Services Authority’s Treating Customers Fairly initiative is high on Arthur’s list of priorities for the Scottish sub-prime sector.
“The days of applying penal rates to people with problems must end,” he says. “We’re looking to lenders to offer rates on near prime that are virtually as good as prime.”
But Stevenson points out that Scottish brokers must encourage relationships not only between themselves and lenders but also between themselves and their clients. For example, brokers need to be aware that their sub-prime clients may not be as forthcoming as they should be.
The final piece in the puzzle is packagers that can use their position in the market to add their own value to the industry’s service.
“We are developing software to streamline the process for sub prime cases,” says Thomson. “Many lenders have already embraced the idea and once it’s up and running we hope that those who are tepid will get on board.”
There’s no doubt that this will be a big year for sub-prime in Scotland. It’s time for lenders to deliver accommodating products and criteria, and time for Scottish introducers to embrace sub-prime as a business opportunity.