The sector may have evolved over the past few decades, but this part of the market still serves a purpose to clients and intermediaries
This week, in another publication, I read an article penned by a lender stating that second charge mortgages were considered a “sub-segment” and “risky”.
Now, I would like to think I know a thing or two about a second mortgage. I underwrote my first one in 1991. I have watched the market evolve in many forms over the past 27 years, partly through necessity, partly through stupidity and mostly through regulation.
In 1991 a payslip, credit search and valuation were all that was required to obtain a second mortgage at a very reasonable rate of 17.9 per cent! The market was small and my then-employer, Cedar Holdings, was considered a major player, which only had three underwriters and a telesales team of eight – happy times.
I left the central office of Cedars (now rebranded to Lloyds Bowmaker) and joined First National Bank. Our 60-strong sales force had one key aim: generate £300,000 of lending volume per annum for the company and you achieve target. Yes, you read that correctly – four second charge loans of £75,000 would make you a superstar.
We would knock on brokers’ doors selling the differential compared to their typical mortgages of approximately seven per cent and the commission-hungry guys out there would offer to go one step further: “We will even go to meet your client.”
We were supported by operational teams underwriting these loans at rates that had a headline exceeding 10 per cent, loans that could fund on a verbal valuation and simple processing. We gave our clients a 16-day cooling off period. We would sweat during those days, praying the client wouldn’t cancel.
Onwards and upwards
In 2005, I left the lending world and entered the world of broking. I realised that brokers wanted choice and a packager with access to a lender panel would be a powerful commodity.
I knew that if I offered an incredible service I may be the chosen packager of loans for the UK broker market. I already had the best underwriters in the market from my days at Lloyds, I just needed the proposition.
The market had changed with self-certification of income, interest-only products, high loan-to-value lending and adverse credit loans being the products of choice – not just in the second charge arena, I would hasten to say – and the sector grew to a high of £6bn before the securitisation lenders withdrew and global economic recession gripped the market. It was lenders such as Together and Nemo Personal Finance (which no longer accepts new applications) that continued to lend, cautiously of course, and the market became just 1.1 per cent of its former self overnight.
Master brokers scraped through with restricted personnel, failed, or diversified to survive. But the launch of Link Lending began the slow process of building the products back to a market that today lends over £1bn in new business per annum.
Still nowhere near its peak, but impressive growth, nonetheless.
In March 2016, the Mortgage Credit Directive changed the assessment of clients who wish to borrow further funds on their homes to a more strenuous underwrite.
Today we are more aligned to a first charge process than we have ever been – gone are the days that lenders guarantee to work all your cases within 24 hours; gone are the days that a straight-forward packaging guide and underwriter checklist would be all that’s required to complete a loan.
We now have more complex requests that I dare say would challenge the most stringent of first charge lenders’. For example, one lender, when examining a
client’s driving licence for ID, asked why the client had added the category to their driving licence to tow a trailer!
How does that impact the assessment of the client and their ability to repay a loan? Add to that a rigid assessment of income and expenditure, gambling habits, payday loans and stress tests of the mortgage rate and I think the lender has it covered.
Also, the Finance & Leasing Association reports that repossessions in this sector in 2018 have reduced to just 0.09 per cent.
Being a master broker in the second mortgage space is never dull, and the market still serves a purpose to clients and intermediaries. But do I think the market is a “sub-segment” or overtly “risky”? No.
Paul McGonigle is chief executive of Positive Lending