If you asked every lender in the specialist market today to give you three reasons why they are different to the others, they will all give you at least two answers, the same as most of their competitors. So if that’s the case then, could they justify their own existence – especially some of the newer entrants? I think not.
Why are they here then? Is it paranoia by some of their investors, believing they must dominate the market? That I can’t tell you. What I can say is, with the majority of them, unless they can offer something completely different and have the strength, or in some cases, arrogance to swim against the tide and try a new approach, they won’t survive in their current guise and although you will never see one go bust, there will be much that changes the way lenders look over the next two years.
Let’s be honest. As mortgage distributors, the past five years have at least given us volume of business. And over the first three years a good percentage of that has been medium to unlimited sub-prime, giving the lender and the investor a higher overall margin. But over the last two years distributors have done a great job of credit repair, with low interest rates and increasingly competitive sub-prime products giving the customer a leg-up back to the high street.
Now, given the present size of consumer debt and the huge rise in debt management companies and Individual Voluntary Arrangement practitioners, coupled with the new bankruptcy regulations you could have a reasonable guess this side of the specialist market will thrive again over the next two years. But can the new lender entrants tough it out while waiting and still make a profit?
The majority of lenders new to the arena are trying to get into the specialist market areas but they are all seemingly doing it using exactly the same credit and risk rules so the product offerings coming out are almost identical.
Some of this is because the US investment banks have issues back on their home soil, while some of it has to do with cavalier lenders flouting the rules with their credit and risk policy – such as Rooftop and its well ” A number of people who we know and love will be out of a job in the next 24 months even if I don’t think they deserve it”publicised recent problems. The only ones which appear to be able to do something different are balance sheet lenders such as Scarborough and Salt but even those with building society influence struggle to be innovative.
The three things lenders need to sell on are price, unique selling points to the consumer and service, and they need a mix of all three. A number of lenders have fallen well short on service and are only half way there on USPs, so they have written products priced so keenly they are making a loss and it doesn’t take a genius to work out this approach is very short-term.
The other way of perhaps managing to survive is to come out with a number of small niche products and work off a very low cost base. But the chances of long-term growth are minimal because of the business structure.
A number of new lenders will simply be swallowed up by others or their parent will “alter strategy in line with market forces” and change their direction until something does work or they are forgotten about. There are others which are part of investment banks that used to securitise funds for a number of lenders and which have entered the market quietly and still expect to receive the same support as they did before.
This seems a little na as they are setting up in direct competition with those they already do business with. I wonder how long that will last and who will win? Then there are those – like edeus – which for all their faults do at least appear to stick to their guns and have an aggressive, if not sometimes arrogant, plan for world domination, and don’t have (much) lender baggage.
Finally, there are the likes of Beacon, which I think is brilliant. It has a good structure with a good plan and low costs. It will will do OK because it doesn’t need world domination but it will never be big. It doesn’t want it.
In a roundabout way I am saying that a number of people we know and love will be out of a job in the next 24 months. Even if I don’t think they deserve it, I think it’s inevitable.
By Terry Pritchard, managing director, Freehold