View more on these topics

Freehold: Crunch time for lenders that cannot justify their existence

The majority of new lenders in the specialist arena are failing to get the mix right on pricing, unique selling points to the consumer and services and are coming up with almost identical products. So it is inevitable that the is market is heading for a shake-up

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

Recommended

Britannia reports 22% increase in mortgage lending

Britannia has reported a 22% increase in mortgage lending to 8.4bn in 2006. The societies annual results show group net lending was 2.3bn while profits were up to a record 130.4bn last year. Neville Richardson, group chief executive at Britannia, says: “Britannia’s record results reflect a growing business that is delivering for its members. Sales […]

Industry launches Mortgage Compliance Forum

Industry leaders have come together to form a Mortgage Compliance Forum to work through some of the Financial Service Authority’s more pressing issues.The newly created forum, which came together for the first time on February 9, is represented by lenders, directly authorised intermediaries, mortgage packagers, mortgage networks and a mortgage distributor alliance.The meeting was chaired […]

HBOS reports gross mortgage lending of 73.6bn

HBOS has reported gross mortgage lending of 73.6bn in 2006, up from 60.6bn in 2005.This represents a market share of 21%, with no change from last year.The lending giants financial results also show net mortgage lending increased to 18.8bn in 2006 up from 11.9bn the previous year. This represents a 58% increase despite market growth […]

First-time buyers ditch parental help

First-time buyers looking to get on the property ladder are less likely than before to turn to their parents for help, the latest research from Abbey reveals.It found that just one in ten potential homeowners expect their parents to offer financial help to get their first home compared to the one in five surveyed six […]

Guide

Guide: how to change your auto-enrolment support

As we approach the two-year milestone of auto-enrolment, employers have had the opportunity to truly assess the capabilities of their chosen support. They are also now realising that getting to the staging date was the easy part, and that support is required for almost every aspect of the day to day running of their scheme. With the three-year re-enrolment window coinciding for many with the total removal of commission and Active Member Discounts from pension-related products and services, as well as the introduction of the pension charge cap in April 2015, many employers will have no choice but to review their support options. But, what is involved in transitioning your auto-enrolment scheme away from your current support options? This guide from Johnson Fleming aims to outline some of these key areas and provide information and discussion points on what you need to consider.

Newsletter

News and expert analysis straight to your inbox

Sign up