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No crisis in the adverse lending sector

Another week, another set of headlines about Britain’s debt crisis. They are a favourite with the national media. One describes it as an ‘epidemic’, stating that some 5,300 people a day seek advice from Citizens Advice about debt.

All this might seem bad news for the mortgage market. After all, mortgages are a form of debt so a debt crisis must be bad, right?

Of course, the position is nowhere near as bad or as simple as it is made out to be. The issue is unsecured debt such as credit cards rather than mortgage debt.

Lenders in the mortgage market are careful who they lend to. They have increasingly precise credit scoring and affordability criteria to ensure that loans are restricted to suitable borrowers who can afford the repayments – far more so than the unsecured market – and of course the debt is backed by an asset, the property.

The media may pick up on rising income multiples and make claims of irresponsible lending but lenders will have undertaken analysis showing the risks associated with this lending and imposed appropriate restrictions using sophisticated modelling techniques.

Arrears and repossessions have gone up recently but from low levels. The Council of Mortgage Lenders expects repossessions to number 12,000 this year which is still significantly lower than the 2001 figure, and I don’t remember anyone getting worried then. Interest rate rises will have an impact in the medium term but the latest rise did not come as a shock to lenders. They will have planned for it, and the next rise that is widely predicted in the next six months.

Meanwhile, debt issues are good news for adverse lending in many ways. Some might presume that sub-prime lenders would be the first to be hit by rising debt but they are the ones who do the most to ensure they have appropriate lending policies.

They are at the forefront of developing sophisticated affordability criteria, credit scoring and risk modelling. There is no indication that arrears will rise above manageable levels – levels they will have taken account of in their planning.

Meanwhile, the number of people falling into the sub-prime category will continue to rise quickly. In particular, the light adverse and near prime areas are set to benefit from an influx of people with relatively minor infringements on their credit histories.

So debt-related problems are likely to be just bad enough to cause demand to go up for sub-prime mortgages without being bad enough to cause concern in terms of arrears and repossessions – in many ways the ideal situation for sub-prime lenders. The proportion of the market accounted for by adverse lending will continue to rise.


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