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Battle for near-prime arena hots up

Since the early 1990s, the sub-prime sector has matured into an industry in its own right. But a battle is now developing between advanced specialist lenders and traditional prime lenders.

Sub-prime companies are starting to target their products closer to the prime sector. As a result a market is emerging to serve borrowers with only slightly adverse credit histories. This can no longer be thought of as part of the sub-prime sector – it should now be considered a separate, near-prime market.

Product ranges of sub-prime lenders have started to encroach onto the traditional territory of their larger prime lending counterparts. This battle could transform competition in large swathes of the mortgage market.

Sub-prime lenders are driving this change through investments in technology. One or two now offer brokers an automated online system that can cascade borrowers into a product that suits them. The salesperson starts at the top of the cascade system, feeding in the characteristics of their customer. At the bottom lies the interest rate the lender has set for this type of borrower.

This allows for a more differentiated product range and brings several benefits. First, it allows the lender to target a wider range of customers rather than just those that suit a set number of products. Second, many brokers prefer this system as it is simple to use and can deal with more of their customers through a single process. Third, it allows the lender to price products more precisely, taking account of risks each characteristic might pose. Of course the broker is responsible for the advice they give so confidence in the cascading system is critical.

The focus on near-prime is bringing sub-prime lenders into direct competition with prime lenders. Is this is a battle the sub-prime boys are destined to lose? They are, after all, smaller and less well known than larger banks.

Things are not so cut and dried. Sub-prime lenders can choose the battleground on which they fight, picking away at bits of the market. By targeting specific types of borrowers, they will not take on prime lenders on a broad front but rather where prime lenders are at their weakest. With their greater knowledge of risk based pricing, sub-prime lenders are well positioned to produce more refined products that can compete in the prime market. Also, their lack of high street presence is not a great problem as they can originate business through intermediaries. Specialist lenders already have a well developed relationship with intermediaries, who now account for 60%-70% of the market.mike culhane is chief executive of The Oakwood Group

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