Concerns about the misuse of fast-track mortgages continue to be raised. Such deals are used by many prime leaders as an underwriting shortcut if applicants score well on agreement principle. The process requires little or no additional information to back up applications.
While this is an acceptable approach for lenders taking on commercial risks by underwriting clients based on a scoring system, there are worries that some brokers are abusing fast-track.
Anecdotally, brokers who put clients through fast-track rather than self-cert say treating customers fairly is their motivation. They say that if they can get clients cheaper deals it must be a good thing.
But there are a number of flaws in this argument. First, these brokers are taking a chance that lenders offering fast-track deals won’t pick their cases up under random checks.
If they did, the lenders would have to pull the applications as brokers would be unable to provide the supporting evidence their investigations would require.
This is bad news for clients as it would cost them time and money. And even if they were happy to stump up for new fees, the Hunter fraud prevention system would record the failed applications and this would affect their credit ratings.
But sadly these facts won’t deter all the wrongdoers. For example, I recently heard of a broker who regularly used fast-track when he should have used self-cert. When asked what he did if a case was queried, he said he pulled the application and applied to another fast-track lender on the basis that lightning was unlikely to strike twice.
Self-cert mortgages are priced for risk and underwritten accordingly, whereas scored fast-track deals are not. As a result, clients could end up with mortgages that may be unaffordable. Finally, this is a manipulation of the system, in particular relating to case compliance. The applications will be recorded as standard prime applications when they should be treated as self-cert.
As we know, self-cert is seen by the Financial Services Authority as a much higher risk than standard prime deals, so better compliance controls are required.
If they are not in place, the regulator would be concerned about firms’ systems and controls for managing risk, with potentially poor results for the industry as a whole.
Then there is the small but not inconsequential issue of fraud. After all, brokers knowingly submitting fraudulent applications to lenders are breaking the law.
I doubt this is a widespread problem but it is a concern and one that’s going to become increasingly prevalent as the market contracts. After all, desperate people do desperate things.
PII costs rocket as ambulance chasers sniff mis-selling opportunity
Insurers have raised brokers’ premiums for professional indemnity insurance by as much as 500% in recent months.
The hikes come on the back of the FSA’s recent review of brokers working in the sub-prime sector. Of the 200 firms the regulator scrutinised, seven were suspended from trading and a further 65 have been recommended for enforcement.
Never one to miss an opportunity, the mis-selling ambulance chasers are now starting to mobilise, with more PII providers seeing a trickle of claims coming in from borrowers defaulting on their mortgages.
This is no surprise to me. Like many, I saw this coming as it was telegraphed by the regulator as early as the end of 2006. But the one thing no-one could have predicted was that the liquidity crisis would accelerate the move to litigation.
As a result, insurers are now looking to mitigate their exposure by significantly increasing rates. They have also imposed restricted acceptance criteria by specifically excluding certain types of business.
But I can’t help thinking that they are shutting the stable door after the horse has bolted because most of the damage has been done.
The Financial Ombudsman Service says that until now the average claim paid out on mortgage complaints was under £2,500. But given their chunky redemption penalties and costly rates, claims on sub-prime deals are likely to be much higher from now on.
With no apparent improvement in the credit markets on the horizon, insurers are getting nervous about these claims and this will hit the mortgage industry’s pockets.