Such is the movement that there is now overlap between traditional niche areas and definitions. And competition is increasing further as investment banks, societies and new lenders look to exploit margins in niche areas.
Recent entrants to the sub-prime market include Northern Rock, Alliance & Leicester and UCB Home Loans. But while these lenders have made overt moves into new territory, what has gone less noticed is prime lenders moving into a number of niche areas by extending their criteria.
A classic example is tolerance levels for credit scoring when considering defaults or County Court judgements, which can take what was traditionally near-prime lending into prime territory. With an increasing number of people prone to CCJs or defaults as a result of faster action from utility companies, the near-prime market has become the new mortgage battleground.
It is estimated that up to 55% of the sub-prime market falls in the near-prime category. As more lenders enter the market it becomes harder for them to differentiate on price. We have seen near-prime products priced at prime rates to win volume. But lenders are questioning how sustainable this is, meaning we have also seen differentiation by criteria.
The result of this has been to push the boundaries on CCJs, defaults and arrears. Yesterday’s near-prime deal is today’s prime, and what were medium adverse cases now often slip into the near-prime category.
Not all lenders have shifted their criteria in unison or adopted a market standard for levels of default in particular sub-prime categories. This has meant there has been an overlap of categories, and is one of the reasons packagers with multi-lender cascading have done well.
I’ve used the near-prime example to demonstrate the issue here, but in a previous article I looked at self-cert lending. Some lenders have increased LTVs on fast-track deals which are based on credit scores and ratings. This is effectively self-cert lending based on a risk analysis up to a certain percentage. And if that doesn’t blur the picture enough, some lenders have relaxed the levels of default they deem acceptable, thus pushing into the self-cert near-prime arena.
This is a great opportunity for brokers to show how they add value – something single product providers can’t do. We are moving towards risk-based pricing models which will change the market significantly.