Just four years ago the secured loan market was accepted as part of the mainstream mortgage market. In 2006, before the credit crunch hit, the sector was in full bloom.
Lenders such as Lehman Brothers-owned Southern Pacific Personal Loans, Barclays-owned First Plus, GE Money Home Lending and Kensington were putting the sector on the radar for mortgage brokers.
Inevitably as the mortgage market suffered its own problems, secured loans took a back seat for mortgage brokers.
But the market is starting to show signs of growth, with new entrants moving into the sector and rumours that some old ones may return next year.
All the signs point to a sector that has the potential to take off, with new lending heading its way. But before it can get off the ground it needs to address the funding issues and regulatory uncertainties that continue to weigh it down. Recent figures from the Finance and Leasing Association do not suggest the sector is in good health. Business fell 19% in August, compared with the same month in 2009, with its members only doing a paltry £22m worth of secured loans.
In the three months to August this year, secured loan business totalled £70m – a fall of 15% on the previous year.
“At its height the market was worth £6bn, now it is £300m,” says Robert Sinclair, director of the Association of Finance Brokers. “It will never return to its previous height, but I do believe it can become a £1bn market within a reasonable timescale.”
The drop in business levels has not deterred new entrants from wanting to launch into the sector and many view it as one that has potential. Unlike the mortgage market, secured loans are not regulated by the Financial Services Authority so would-be lenders do not have to jumpthrough the FSA’s application hoops and adhere to new capital requirement rules.
There has been news of a number of new entrants over the last few months. Robert Owen, former chief executive of secured loan lender White Label Lending, is in the final throes of agreeing funding for a new secured loan lender to be named Chambers Harris and hopes to launch in 2011.
And Portal Portfolio, a new secured lender that uses pensions to fund its loans, was launched earlier this month.
“I wouldn’t be surprised if by February next year the market doesn’t have another three or four active lenders,” says Steve Walker, managing director of Promise Solutions.
The only restrictions the sector has on its products are of funding, but as this has increased, competition in the sector has started to hot up. Until recently the highest LTV on offer was 85%, but this has risen to 90%. Borrowers who are self-employed or have been made bankrupt get no help from lenders in the mortgage market, but secured loan providers can cater for them.
“A lot of mortgage brokers are not aware that the self-employed and those with County Court Judgements and defaults can get a secured loan,” says Walker. “We get calls from brokers who are almost embarrassed to ask if there is anything we can do for adverse borrowers, but there is.”
But although products are available lending still remains low. This can partially be attributed to the small number of lenders in the sector, but Walker says there may be another explanation. He believes the lull in lending is down to a lack of consumer confidence and the reluctance of mortgage brokers to offer secured loans.
“Borrowers are still not being aspirational when it comes to borrowing, they are borrowing out of necessity as opposed to a few years ago when they were doing so on a whim,” he says.
A recent Mortgage Strategy Online poll revealed that only 59% of brokers are offering secured loans to their customers.
“Many brokers have been quick to assume that lending on secured loans is as strict as it is in the mortgage market,” says Mike Chamberlain, marketing director at Strawberry Loans. “But someone who has been declined a remortgage could find a suitable deal from one of the secured loan lenders that are crying out for business.”
New entrants to the market will be hoping to change this. Owen is no stranger to the mortgage market, having been chief executive of specialist lender London Mortgage Company until 2006.
“Brokers need to have more than one tool in the toolbox,” he says. “Secured loans have an early repayment charge of only one month of the interest on the loan – it’s a good way to borrow for the short term.”
At its height the sector was unsustainable and what is emerging is a market more consistent with that in the 1990s
Restrictions mortgage lenders have placed on criteria and lending volumes have helped the secured loan market cater for borrowers who otherwise would have been turned away.
“Borrowers on low SVRs do not want to remortgage because they know they will end up paying a higher rate,” sales Dale Jannels. sales and marketing director at All Types of Mortgages. “If they are looking to consolidate their debt a secured loan would be better.”
AToM has recently signed up as the exclusive distributor for Portal Portfolio, a new secured loan lender. The lender has received a mixed reaction to its proposition because it uses a pension fund to fund its loans. It is offering loans up to £75,000, with rates from 9.9% up to 80% LTV for the employed or self-employed.
Whether or not its strategy will succeed, it is still good for the sector to have new blood and funding.
Lenders are restricted by the funding available to them, just like mortgage lenders. But at its height the sector was unsustainable and what is emerging is a market more consistent with that in the 1990s.
“Products are limited and are reminiscent of when I first started in secured loans in 1997 but we mana-ged fine back then,” says Matt Cottle, commercial director at Y3S Group.
Y3S recently launched a 90% LTV product called the lifestyle loan. It is funded by a special purpose vehicle via high net worth private investors and some adverse credit will be accepted.
“Until this April we still had funding issues with most lenders, but the secured loan industry has more funding now,” says Cottle.
He says there are numerous rumours among secured loan brokers and lenders about new providers launching into the market.
“The robustness of the industry never ceases to amaze me,” he adds. “Every financial intermediary should have the number of a good packaging broker in their mobile. Roll on 2011, I can’t wait.”
At the moment the secured loan sector has the upper hand on the mortgage market in terms of products it can offer, but this could be in jeopardy if new regulation is pushed through. In November 2009 the Treasury announced that it would extend the scope of FSA regulation to include secured loans.
The sector is regulated by the Office of Fair Trading and those working in it must hold a consumer credit licence. But there is no timescale for the regulatory changes.
In a speech in June this year, Lesley Titcomb, director of small firms and contact centre at the FSA, reaffirmed its commitment to regulating secured loans.
“It may be helpful to transfer to us responsibility for the second charge market and secured loans,” she said at the time. “The previous government said this was also its policy preference. We don’t know when this transfer will happen, especially given the change of government, but it makes sense for us to be thinking now about our regulatory approach as there is plenty of detail to work through and questions about what we should take from current consumer credit protection into any FSA regime.”
The Treasury proposes that the regulation of secured loans should fall under the FSA’s Mortgage Conduct of Business rules.
“FSA regulation will be bad news for the industry,” says Walker.
He doesn’t have a problem with the FSA regulating the sector per se, but he is concerned it could impose similar restrictions on the sector as it is doing on the mortgage market through the Mortgage Market Review. But it is unclear whether the FSA or the Consumer Protection and Markets Authority will regulate the sector before regulatory reform in Europe.
“I can see the FSA deferring regulation of the secured loan market until Europe has acted,” says Sinclair.
The regulation of secured loans, like the mortgage market, is currently the subject of debate in Europe.”The Consumer Credit Directive is being debated in Europe, but it does not cover secured loans,” adds Sinclair. “Secured loans are likely to fall under its mortgage directive, which is expected in Q1 2011.”
He says Europe places secured loans in the same category as mortgages, unlike the UK which places them in the consumer credit category. So changes proposed for the mortgage market in Europe such as a 10-day cooling-off period could hit the sector.
Sinclair says that when the mortgage directive is released there will need to be a debate on how it will apply to secured loans and whether it can be adapted to individual countries.
“We will need to have a detailed debate around things such as the cooling-off period and fees,” says Sinclair.
He adds that despite the AFB seeing its membership drop over the years, it remains committed to the market and has no intention of abandoning it.
“The AFB and the Association of Mortgage Intermediaries will continue to work hard to make sure the secured loan sector is protected,” he says.
Apart from the threat of regulation, the sector is also likely to suffer from the fallout of the FSA’s payment protection insurance guidelines. A lot of secured loan firms have relied heavily on PPI sales in the past. The FSA has so far taken action against 24 firms for failings in PPI sales since 2005, with fines totalling nearly £13m. It has also stopped the sale of single premium PPI.
It says in the past five years there have been over a million PPI complaints. Firms on average reject around half the PPI complaints they receive, but some reject nearly all the complaints. The FSA has released guidelines for firms that sold PPI on how they should deal with complaints. These guidelines need to be in place by December 1, but some of the big banks have rebelled against them and are refusing to implement them, arguing they allow the FSA to apply new rules to sales that were carried out in previous years.
The British Bankers’ Association has applied to the courts for a judicial review of the FSA’s complaint-handling approach. It believes its procedure for PPI complaints risks setting a precedent, which will allow the regulator to apply new rules to previous sales for any financial product.
So far Lloyds Banking Group and Barclays are defying the FSA by putting on hold any PPI complaints that might be affected by the review.
“Our guidance to firms has been that they can only put on hold complaints that are caught by the review,” says Sinclair.
But because a lot of AFB members are brokerages and do not have large compliance departments like banks, they may not be able to assess what will be affected by the review and what will not.
“It might be better to be safe and carry on processing all complaints,” says Sinclair.
The secured loan sector was one of the first to have firms phoenix when the credit crunch hit. One of the reasons cited for such strategies was so that firms would not be liable for future PPI complaints. But Sinclair argues that it is too early to say what impact the review or the new guidelines will have on secured loan brokers still in the sector.
“It is hard to say how the new guidelines will affect secured loan brokers,” he adds. “A lot of the firms stopped selling single premium PPI a few years ago and some of them never sold it at all.”
The sector has suffered highs and lows over the past five years. But now it looks set to be on a par with the mortgage market in terms of recovery. It will not escape regulatory change and although regulation may encourage more borrowers and mortgage brokers to recommend secured loans it could also stifle some of the innovation in the sector.
There are also problems with the way the sector and the products are perceived by mortgage brokers and some may still be missing out on recommending their clients the best deal.
Although the sector has some way to go in reaching normal conditions, it has taken off and there is only one way for it to go from here – up. n
Signs of spring after long winter
The credit crunch destroyed supply to the secured loans market and so brokers had to dramatically reduce costs and infrastructure.
As if this was not challenging enough, brokers were also forced to adapt their business model following changes to the consumer credit act and the ban on PPI selling at completion – both of which materially changed the level of lender commission paid.
The specialists have successfully adapted to this challenge by introducing a fee-charging structure to produce their core income and so are in a Retail Distribution Review world already.
Remortgaging loan approvals have dropped, creating a gap that secured loans can fill
Nevertheless, the secured loans market is starting to recover. Supply is improving and this is encouraging specialist loan brokers to start investing in marketing strategies and infrastructure. We launched this year and there are other new entrants looking to follow suit. This is encouraging for brokers and the sector.
There are also a number of factors that should support a return to a more healthy volume in the secured loans market. First, mortgage lending has shifted towards a purchase bias. Bank of England figures show that in September 2005, remortgaging accounted for 52% of the £25bn of loans approved. By September 2010 remortgaging was down to 36.5% of the £10.4bn loans approved.
Perhaps even more significantly, the number of remortgage loan approvals dropped from 113,000 to around 29,000 over the same period. This has created a gap that secured loans can fill when brokers seek a solution for clients looking to raise capital for home improvements or other significant personal projects. This gap can only be made wider if the Mortgage Market Review delivers the kind of brake on mortgage lending currently being anticipated.
Second, unsecured lending is at record levels. The latest bank figures show that there is £215.8bn worth of consumer credit outstanding – more that £8,000 per household. As consumers look to manage their finances there is considerable benefit to migrating many of these facilities into more affordable secured products.
Third, the property market is stagnating due to limited mortgage finance and consumer worry over falling house prices. As an alternative, consumers are looking to home improvements to increase living space and create value in their property. This is fertile territory for secured loans, and with next to no redemption charges now a feature of this sector, clients have a flexible solution that leaves their primary mortgage finance unaffected. This is attractive given the repricing of mortgage deals.
So while conditions still remain difficult, it feels right that for the first time in a long winter there are signs of spring.
Chief executive officer Link Loans
Lending renaissance in 2011
When I am asked about the state of the market for secured loans, the answer has to be given in two parts. To have a market for a product or service requires both demand and supply. There is no doubt there is huge demand for secured loans so one part of the equation is in rude health, but the second part, namely the ability to fill that need, is still pretty weak.
So we have strong demand clearly showing there is a market for the product, but inadequate resources to meet that need. As far as the causes are concerned, unless you have been asleep for the past three years, I won’t state the obvious. But the remaining obstacles to improving the supply side revolve around a number of factors.
In the absence of any kind of resurgent securitisation market, he sector is still in recovery mode
Coming out of recession, funding sources have concentrated on consolidating their balance sheets and restructuring. While lending in general for residential first and second charge and commercial lending has definitely come off the bottom, in the absence of any kind of resurgent securitisation market, along with the other forms of lending, we are still in recovery mode.
Critically, the restriction in criteria has also played its part. Naturally lenders are cautious in the level of risk they are prepared to take on and while much of the dead-end enquiries for clients with multiple credit problems have thankfully all but ceased, we, along with our fellow secured loan packagers, are inundated with good quality enquiries with good security and credit that still won’t fit.
Arguably, secured loans have more flexibility than first charge lenders in terms of criteria and this has helped, particularly where brokers have clients who traditionally took further advances or remortgaged for consolidation purposes or for large ticket items such as holidays. As the cost of remortgaging has increased and the supply has dried up, secured loans have provided a much needed resource.
Looming over us all is the impact of the Mortgage Market Review. I realise that secured loans are not under the Financial Services Authority’s regulatory control, but for a lending industry already punch drunk from the recession, the effect of the time taken to consult has already had an adverse effect on likely new starters and the return of older brands. We know there are plenty of lenders ready to come into the market, but many are still waiting on the sidelines.
Above all this is the precarious economic climate and the state of the housing market. It is hardly surprising that we have still hardly got out of first gear. That being said, there have been some positive moves from lenders this year and 2010 has been a better year than 2009.
But ever the optimist, I believe that 2011 will see a renaissance in secured loan lending, albeit slower than we would like.”
Differentiation is key for lenders
The secured loans industry has undergone significant change over the past few years. The market has seen considerable contraction, with many of the bigger names exiting in 2008 and 2009 after finding themselves unable to offer secured loans as funding evaporated.
The regulatory changes in the industry have been many and far-reaching, and are only set to continue as we wait to see the full impact of the Mortgage Market Review and the Secured Lending Reform Bill.
In its efforts to avoid a repeat of the housing crash, the Financial Services Authority has been accused of over-regulation and stifling the recovery of both the mortgage and secured loans markets. But the reality is that we are living in a different world now and lenders must adapt and innovate to grow.
To see market-wide recovery, lenders need to be prepared to recognise other creditworthy customers
Rumours abound that a number of well-known names will return to the market in 2011. Already we have seen a handful of newcomers or re-entrants to the industry, and those with the greatest potential seem to be the players with strong funding structures or with the aim of addressing certain niche sections of the market.
The greatest challenge facing brokers will be that new lenders will opt to address the new layer of customers that would previously have been seen as prime.
Of course, more lenders is great news for brokers and the market, as the new lending landscape presents them with new products to offer customers.
But the volume of clients in this space represents a relatively small segment of most brokers’ portfolios, which means they could find themselves placing the same amount of business across a broader spread of lenders.
The danger for lenders is that this is a competitive space and may be stalled if they cannot differentiate and offer something new. Those that recognise opportunities and innovate to meet the changing demand will help grow the market and provide a sustainable portfolio of products for brokers.
The industry must cater for the needs of the remaining traditional customers and recognise that creditworthy doesn’t necessarily mean that borrowers must have perfect credit histories.
In times of recession, everyone has the potential to suffer a credit record discrepancy.
To see market-wide recovery in the secured loans sector, lenders need to be prepared to recognise other creditworthy customers with sustainable affordability, to ensure that potential clients are not left by the wayside.
Ultimately, by servicing the demands of these customers prudently, the market will once again broaden and niche elements will create growth for those prepared to stand out from the crowd with appropriate products.”