Jumping on the sub-prime gravy train

The dividing line between bending over backwards to help someone buy a home and being an irresponsible lender is getting finer.

These days, few brokers are unable to find lenders for any of their clients. Lenders are providing loans for just about anyone who wants one, whether or not they have a history of failing to pay.

The sub-prime market is booming thanks to the money to be made there. Under clever labels such as near prime and light adverse, a lot of people who are not ideal customers are being given the chance to get into deeper trouble with their finances once again.

Of course, brokers play a big part in the pretence that everyone can manage to buy their own home.

I wonder what proportion of brokers’ training is devoted to recognising that some people can’t be trusted to look after their money. I suspect a much greater part is dedicated to finding deals to suit even the least likely customers and to looking for ways to make it easier for the least responsible clients to find ways to borrow, and borrow more than before.

To be fair, people often have poor credit histories because of changed circumstances such as unemployment or divorce and many manage to get back on their feet. Sub-prime mortgages are a godsend for them.

But there are too many sub-prime businesses around for them to pretend they are part of a caring little niche any longer. All the lenders are at it, from the largest and most established to the smallest newcomer. They are all jumping on the juicy sub-prime gravy train.

And they are not content with looking for new ways to measure affordability or raise income multiples. They are opening up their own light adverse or near prime subsidiaries. This keeps the dodgy lending at arm’s length from their main operations so their responsible lending brands will not be sullied.

In this country, we collectively owe 1.2trillion, of which 83% is in secured loans and mortgages. Although only 10,250 homes were repossessed last year, this was a frightening 70% up on the previous year. And the forecast for the next two years is for more rises. But the great thing about sub-prime lending is that the deeper in trouble a client gets the more you can charge to help them out. The interest rate is higher for sub-prime deals, the broker’s commission is probably higher, and if borrowers default the lender can recover its cash by taking back the property. Another bonus for lenders is that house prices continue to rise.

I’d like to think that property investors’ belief that lenders are more likely to repossess in a rising market because they can get all their money back is nonsense, but to be honest it wouldn’t surprise me.