Despite this there are still negative perceptions held by industry insiders and the public. Changing these is not easy but brokers and lenders must work together to make sure they do not form a barrier to innovation or the realisation of the sector’s potential.Some people still see the sector as risky, which is unfair. It is true that it has a higher default rate that the prime sector but only marginally higher – most borrowers experience few or no problems with repayment. Lenders are able to take account of the extra risks associated with individual borrowers by setting higher interest rates. The risk management techniques available to lenders have become highly sophisticated, particularly those associated with the capital markets and underwriting such as affordability calculations. Again, these allow lenders to reduce their risk exposure. Other incorrect perceptions surround the sort of people who require these mortgages and particularly those taking out sub-prime deals. There are negative connotations to the label sub-prime. It suggests clients are unable to manage their finances properly, are earning less money, have considerable debts already or have other issues that mean repayment is tough. These are largely unwarranted. Only a small minority of sub-prime clients fall into difficulties with repayments. After all, there is no incentive for lenders to take on borrowers who can’t afford mortgages. Most sub-prime clients have reasons for their credit problems such as divorce or unemployment, from which they have since recovered. And it is not true that sub-prime customers are generally poorer than their prime counterparts. Some of these incorrect perceptions can be blamed on the awful names the sector has accrued. First we have ‘sub-prime’ – a phrase that suggests the sector is in some way inferior. Then there is ‘non-conforming’, which I have used here but which suggests something odd. Perhaps ‘specialist’ or ‘credit repair’ should be more widely used. That might help the sector gain a rightful reputation as a source of inclusivness and innovation within the mortgage industry.
The reputation of sub-prime or non-conforming lending has come a long way in the past decade. As the market has matured, it has had an image overhaul any PR man would be proud of. It is now an important and flourishing part of the overall mortgage market.