If you believe the rumours, subprime is back. A number of lenders are now catering for borrowers with impaired credit history. Indeed, lenders like Bluestone and Pepper have made it clear that they are ready and willing to offer loans to those who have experienced financial problems or difficulties in the past. So is this a good thing? Or not?
Well, let’s be clear subprime has its shady reputation for a reason. Lest we forget, British banks lost more than £12bn in bad debts after the US property market imploded in 2007. This led, in turn, to the collapse of Northern Rock (at a cost of over £26bn to British taxpayers), the abolishment of the UK’s Financial Services Authority (due to perceived regulatory failures) and a dismal climate of recrimination and anger. In the long term, it helped to create a sustained era of austerity and a decline in growth that continues, many would argue, to this day- quite a legacy.
In the years following the crash however, the subprime market fell (from over 7000 ‘credit impaired’ products on sale as of February 2007 to zero by October 2009) as stricter rules on mortgages were introduced.
Yet, as lending conditions eased under George Osborne and house prices continued to rise, demand for affordable housing grew accordingly. With post-Brexit anxieties leading to lower forecast rates of growth and relative job stability, moreover, tightening mainstream loan criteria have led to a demand increase in ‘unconventional’ loans with which to accommodate the many millions of people within this country who have incurred problem debts or are struggling with low incomes. In effect, demand is high but opportunities are low for aspiring house owners of a certain calibre and this has provided the perfect backdrop for the return of subprime.
So, should we be concerned? Do we stand upon a precipice of renewed financial disaster or a new era of opportunity and inclusiveness? Well, it’s worth remembering that, in and of itself, subprime was never a terrible idea. In a market driven economy it is obviously right that those markets should cater to borrowers of varying financial backgrounds so long as they can be conceivably judged to afford it.
We shouldn’t forget that for all the odium, subprime mortgages helped hundreds of thousands of people to become homeowners, irrespective of blemish free credit records. Secondly, we need to recognise that legislation has changed and that ‘old style’ subprime mortgages no longer really exist, and rightly so.
Indeed, perhaps to begin with we could do with a rebranding exercise- to wash away the toxic connotations that continue to swirl around the product, causing people of sound judgment to run a mile.
With the rise in the number of self-employed or contract workers as well as borrowers with tainted credit ratings, many new mortgages have been developed with extra safeguards in place to help borrowers and protect our industry alike. It doesn’t seem like too much of a leap to assert that mutually beneficial mortgages such as these can help to grow the economy, increase profits and provide new hope so long as people on both sides conduct themselves responsibly.
Responsibility and diligence are the keys to future security and success. Although most of the issues surrounding lax or degenerate lending in the build-up to the financial crash were largely unrelated to the activities of mortgage intermediaries, it is still important to recognise what went wrong and innovate changes based upon those findings.
Much of these changes have been dictated by the FCA, under MMR and MCD rules. Increased focus on affordability – not just for now but for the future too – will help to mitigate the risks and as long as lenders, brokers and indeed customers recognise that the subprime of the past cannot return we should be OK.
Indeed, there is no reason why brokers cannot shake off the ghosts of the past and turn subprime into the success story it always could have been.
Phil Whitehouse is managing director of MCI Mortgage Club