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Specialist lending will return, says TFC Homeloans

TFC Homeloans, the specialist distributor, believes that the backed-up demand for mortgages for non-conforming applicants will spark a revival of the specialist mortgage market.

Following last week’s announcement from Kensington that it will consider lending to applicants with CCJs and defaults, many commentators – Kensington included – have been quick to quell discussion of any prospect of a return to lending to applicants with adverse credit.

TFC Homeloans feels a revival in this sector is inevitable though, as growing demand from borrowers and advisers alike will lead lenders back to specialist lending.

Andy Brown, managing partner of TFC Homeloans, says: “Undoubtedly times have changed, but the concept of supply and demand has not, and there’s no doubt there’s demand in the market for adverse credit mortgages.

“Pragmatic underwriting approaches– rather than the clinical, automated, ‘me too’ approaches of old – can ensure risk-based pricing and deliver decent returns for forward thinking lenders.

“Specialist products such as Sale and Rent Back are now providing an option for some borrowers who might previously have taken heavy adverse mortgages, and short-term finance is an increasingly popular option for those looking to repair their credit.

“But between the quasi-prime criteria of Kensington’s welcome new proposition and these specialist products there remain huge gaps, with massive demand which is currently untapped.

“Where there’s clear profit potential, funding will become available, and hopefully sooner rather than later.”

Julian Wells, co-founder of Marketing Innovation Forum and previously head of marketing at specialist lender Mortgages plc, says nature abhors a vacuum, and product developers like nothing more than innovating to fill gaps.

He says: “The recession will leave people with impaired credit records for years to come, just like it did in the 90’s, but with the recovery many of those same people are getting back on their feet and will be eager to own their homes again or remortgage.

“It’s great there are now more diverse product sets available, but many are niche areas, and the traditional specialist market is not being serviced. It seems inevitable that it will return, and who’s to say that Kensington’s move won’t prove the catalyst for other developments in 2010?”

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  • anonymous 14th April 2010 at 9:00 am

    Good point from the Grey Haired one. A computer can’t beat a trained underwriter armed with the facts at assessing the risk of non-repayment, especially now the last 2 years will leave more and more people with non standard credit histories.

  • Grey Haired Underwriter 13th April 2010 at 11:53 am

    The tragedy of the market is highlighted by my dark haired colleague. Here is a skilled risk taker unemployed whilst the large lenders still blithly persist with scoring. Don’t get me wrong, I believe that scoring works with the lowest of risks and this is undoubtedly highlighted by the tightening of criteria seen from the large banks but what about the percveived higher risk cases – the ones with small defaults, minor income stretches, lack of a full credit history. There are some good cases to be approved but a machine can’t discriminate between individuals and lumps them all into one pile. It takes a lot of experience to weed out the bad or fraud cases and it needs intelligence not automation.

    If anyone needs a good example as to the effectiveness of scoring just remember that GMAC were champions of electronic underwriting and note the news today that they are trying to exit the European market, or the arrears numbers that came from some of its securitised books. Small Building Societies have had to be niche lenders for years because they couldn’t compete on price and yet they are declaring some of the best results. I wonder why?

  • i agree 13th April 2010 at 9:21 am

    i agree with the article, smart funders could clean up by providing funding to this market. they could write their underwriting policies to pick and choose thousands of would-be borrowers who represent little risk, who are currently in limbo. the client, adviser, lender and funder win (and the packager if they’re involved), nobody loses. i can’t wait for that day and i agree common sense says it’s inevitable.

    i also agree high proc fees incentivised unscrupulous advisers to push clean business to sub prime/non conforming/call-it-what-you-like lenders, which was shameful. those proc fees are unlikely to return, but they don’t have to, there’s such a huge market for this kind of business that a little more relaxed underwriting would go a long way

  • Dark Haired Underwriter 12th April 2010 at 3:57 pm

    The issue with specialist lending is not that there are no lenders willing to do this type of lending, it’s that there are no investors willing to “invest” in this type of mortgage at present. Hence all remaining lenders of this type have moved to lending in the “prime” arena if at all possible or else ceased lending all together and are just maintaining infrstructure at the present time in the hope of a return of investor funds. The move to prime lending allows any specialist mortgage to be “blended” into the whole pot and still allow any MBS to be considered prime.

    When investors believe that the likelyhood of major losses have significantly reduced, the returms available will allow them to re-invest in this market. The usual indicators on this are house prices indices [starting to look more positive] and rates of unemployment [unable to clearly detirmine what is happening here yet].

    Until specialist lenders can move this type of lending off their balance sheets they will have no ability to lend unless they are able to obtain a banking licence and run a retail deposit operation. Rates charged/returns made will have to be sufficiently attractive to the investors to get the ball rolling so I would suggest that they will initially be higher than most would wish.

    As an experienced, old fashioned mortgage underwriter, who is currently unemployed, I have no wish to see this market constrained any longer than it needs to be but without some form of government intervention on this I dont see an early end to the situation. Rising house prices/ falling unemployment are the only possible saving graces.

  • Robin Banks 12th April 2010 at 2:21 pm

    Grey Haired; oh, if only the world was that fair ! Do you think it’s wrong for the markets to price Greek bonds higher because of the risk of default? of course it’s fair, they don’t HAVE to lend this money you know, just like the investors coming back to the sub-prime market don’t have to lend their money, but where will we be without them, with a lopsided market that will probably never recover, that’s where we will be.

    Nobody wants to see rip off rates, like we have now in that sector, that’s why we need a degree of competition. But rates offered to high risk borrowers that are in line with those that are offered to no risk borrowers are unsustainable – we now know that so there has to be a middle ground.

    If it worked before, it can work again, all we have to do is learn the lessons of the past and not allow the unsuspecting investors (i.e. those who deposit their money in the “safe” Building Societies) to be duped into lending into a market they do not understand nor wish to invest in.

  • Paul 12th April 2010 at 1:05 pm

    Grey Haired – It soes not matter what you want to call it, this type of lending is required. It is not as straightforward as somebody not able to pay a mortgage. What if people have had their circumstances change due to loss of job, new addition to the famil, or any other reason and found themselves temporarily overstretched financially. What if the missed payments have been on 19% credit cards or 12% unsecured loans. Surely it would make sense to allow a remortgage albeit at above high street rates if they cannot pass the ridiculous credit scoring of a prime lender, as long as this was putting them into a better position? Specialist lending has been titled as such as this is what it is. Lending outside of the norm. The quicker a sensible form of specialist/adverse/sub-prime lending returns to the market the better.

  • Grey Haired Underwriter 12th April 2010 at 11:57 am

    It is inevitable that sub-prime will return but call it like it is. It is adverse credit lending, not specialist or non-conforming or any other grandiose title. And sub-prime indicates higher risk based on ability to pay. So the borrower has had payment problems and their new mortgage gets priced for risk (or jobbed as it was formerly called.) The logic escapes me – the borrowers have had problems paying their debts and we solve this by lending them at a higher rate than the norm?

    I just hope that they are not machine assessed or abused by the lender just because they are in a weak position. And I hope that proc fees are lower than standard fees so that there is no inclinition for a less than scrupulous intermediary to classify someone with a minor problem as being adverse just to earn a bit extra. I know there will be howls of derision about that statement but I have seen it.

    I also wonder if brokers wouldn’t prefer a return to a more sensible BTL market rather than adverse or are they hoping for the whole ‘shotting match’.

  • testing 12th April 2010 at 10:56 am

    I fully agree, indeed I’m a good case in point, having worked in this industry for the last 15 years and having suffered like many of the last 2 years, I have just about avoided losing my home, now I getting back on my feet, I could do with a remortgage yet even with a LTV of 25% no one will touch me !

  • Robin Banks 12th April 2010 at 10:06 am

    “Sensible Adverse Lending” was introduced in 1996 by Kensington – it only became stupid when the high street lenders (Andy Hornby and his like) decided they liked the look of the huge profits and stupidly competed in this market on rate !

    It’s not a rate driven market, never was and never will be, it’s criteria and risk driven which in turn dictates the rate which in turn dicates the demand – thereby it becomes a self controlling market.

    It doesn’t take a genius to work out how this sector fits into the overall structure and how to control it.

  • ian holmes 12th April 2010 at 9:38 am

    The proc fees paid at the time were certainly welcome at the time. At the time Lenders were happy to pay it and we brokers were certainly happy to receive 50% + of that proc fee.

    Undoubtedly though things have changed and I don’t think anyone wants to see the market return to some of the practices seen in the past.

    With sensible adverse lending will come sensible pricing, and remuneration for the outsourced administration and the advice given.

  • jeff kayner 9th April 2010 at 4:58 pm

    It will as long as packagers don’t want 3/4% out of the deal as they did before…

  • Paul 9th April 2010 at 4:46 pm

    There is undoubtedly a need for specialist lending to return and the sooner the better. If products are priced for rik and are transparent to investors then we will not return to the old ways.

  • R Harris 9th April 2010 at 4:26 pm

    I wholeheartedly agree with this sentiment and read an interview with Nationwide’s Matthew Wyles (who is also CML Chairman) which said much the same thing. Sensible lending to people with impaired credit will certainly return and the sooner the better!