Savills Lending Solutions
Complex prime is the new buzz word in the market and is one of a range of innovations which I believe shows better times are around the corner for mortgage brokers. The truth is that complex prime has always existed.
Prior to the period of mass credit scoring even the most rudimentary cases could be deemed as complex because they required skilled underwriters spending time deciding – with a large amount of supplementary evidence – whether cases were suitable. Then came the onslaught of the IT barons who dismissed conventional wisdom and the fashion changed to automatic scoring cards and automated valuation models.
Now, three years into the worst business hangover of our lives, certain developments have made this old-fashioned approach fashionable again.
Private banks are rarely referred to when we look at players in this new world which seems ironic because by volume, I reckon they are still the largest players. Sadly, most brokers don’t have access to them but distribution routes do exist for all advisers. Private banks offer a pragmatic approach for some unusual clients but the most important words for entry are high net worth.
The analogy of trying to start a lake in a desert with a glass of water springs to mind
This year has been underwhelming, with a lack of innovation and new lender activity. Like most, I expected the recovery to be well underway by now instead of barely a trickle of new activity. That said, how nice it is to see my old friends at Kensington finally able to use the massive financial muscle of their FTSE 100-listed parent to speak controversially about what isn’t happening and deliver some limited products to help.
The pent-up demand is such that, positive as these recent additions are, the analogy of trying to start a lake with a glass of water in a desert springs to mind.
The existence of complex prime ensures that mortgages will not only be distributed by branch-based advisers with limited products via largely state-backed lenders.
It marks the return of a pragmatic and fair form of mortgage decision-making which, although less efficient in terms of the time taken to process deals, means that results should be consistent and hopefully not leave brokers scratching their heads in disbelief when seemingly perfectly good cases don’t go through scoring systems. But we are still a long way from a world of home loans for everyone. That would require a fully functioning sub-prime market.
Product is what it says on the tin
Sales and marketing director
All Types of Mortgages
Complex and prime are two words that have made a big comeback in recent times, and ones that I suspect will be used a lot more in the future. So first let’s nail a myth – complex prime is not sub-prime. It is what it says on the tin – complex and prime.
What do I mean by complex? Well, take a client whose income is made up of a number of strands which might include employed PAYE, trust income, a second job and investment income too – that’s complex. As is a customer who needs a cross-collateral charge on another property or parental support.
Or one who, with an income stretch, is willing to deposit two years’ worth of mortgage payments upfront with their lender to give them comfort. The list goes on and basically whatever the requirement, if it is a good sound case and affordability can be proved it may fit the bill as a complex deal.
Next, what do I mean by prime? Well, this part is simple – it’s an applicant who has never missed a beat on their credit profile.
So complex prime is not a new phenomenon. Back in the 1990s, before the advent of the credit scoring mentality, it was a thriving business model. Think back to the good old days and imagine a lender’s underwriter studying the big picture, warts and all, then deciding whether or not to lend. Importantly, once their decision was made they stuck to it and did not keep moving the goalposts, if you recall.
An increasing number of lenders are starting to recognise the value of going back to basics
We have simply gone full circle. Lenders may think that they have wonderful credit-scoring systems designed to ensure that they capture the best mortgage applicants but experience shows that this black box mentality regularly turns away the very customers that they should be lending to.
The asset-rich who often have no credit liabilities are often declined because they don’t appear on the electoral roll or their various income streams cannot be combined. The list of examples is endless and these are the individuals who would most benefit from manual underwriting where humans look at, feel and touch the application making sensible judgements based on facts rather than computer logic.
An increasing number of lenders are starting to recognise the value of the back-to-basics approach and it’s no coincidence that these are the ones that are beginning to thrive once more.
So complex prime is not the new sub-prime, although you may get the odd missed payment or historic and minor adverse case reviewed. But anything more than this would have to be classified as complex sub-prime. Yes, you heard it here first and maybe that will be the next market to reopen.