An increasing number of niche areas are available for sub-prime lenders so a wide range of customers with differing needs and circumstances can be targeted.
Sub-prime lending practices are also changing, with some commentators noting that the assessment procedures that helped open up sub-prime lending are being superseded by more flexible techniques that can draw on better data about credit repayment profiles.
Affordability-based lending is the most prominent example of this change and highlights how prime and sub-prime lenders have to adapt to a changing, competitive environment.
There is a significant reliance on brokers to introduce sub-prime business. This introduction system is itself subject to a hierarchy, as can be seen from the emergence of master brokers and packagers that stand between individual brokers and lenders. Packagers work on behalf of a small number of sub-prime lenders, preparing cases for them. Brokers pass applicants to packagers as well as dealing with lenders directly.
Packagers perform a useful function in the middle of the mortgage application chain. For brokers, they help find the best deals and process some of the paperwork in preparing applications for underwriting and the issuance of offers. For lenders, they provide a broker-facing distribution and administrative process.
This specialisation has grown across the industry as a result of the drive to reduce costs. The process has led to the unbundling of traditional lending functions – the originating, funding and servicing of mortgages – with specialist firms emerging and concentrating on providing the parts of the process at which they are most efficient.
Such activities are perhaps most evident in the sub-prime sector because they individualise the nature of risk assessment. The number of super-packagers has increased as the packaging sector has consolidated since regulation, while several packagers have become prominent in lending, thereby acting as distributors and manufacturers.
Sub-prime lending is established and has evolved rapidly but it is essential that in a rising interest rate environment distributors and providers deal with any financial difficulties sub-prime borrowers have with care and take on board the principle of treating customers fairly. In this regard, the emergence of credit repair products will create opportunities for brokers over the next few years.