View more on these topics

Adverse and worse

Paul Thomas takes a look at the pre-credit crunch product guides of sub-prime lenders

Sub-prime lender product guides reveal the relaxed lending criteria and high commission levels available before the credit crunch.

Before the crisis there were a large number of specialist lenders in the market offering borrowers with impaired credit the opportunity for mortgage finance.

These lenders, which were largely non-deposit-taking organisations funded through the wholesale markets, were typically known for relaxed underwriting criteria compared with high- street lenders.

Typically, these institutions paid far higher commission to intermediaries for referring mortgage cases. Sub-prime lenders frequently offered intermediaries commission of over 1 per cent while high- street lenders offered less than 0.4 per cent.

Chadney Bulgin mortgage partner Jonathan Clark says this resulted in some borrowers being pushed into unsuitable products.

He says: “Some people who were borderline and who could have gone to a high-street lender got pushed into an adverse-credit situation. That definitely happened.
“If you had an adverse-credit mortgage, the procuration fee was certainly in excess of 1 per cent. If you were a broker who had a few bills to pay, you might have been tempted to do adverse-credit products, instead of going to a high street lender and getting 0.35 per cent. That was a problem.”

John Charcol senior technical manager Ray Boulger says these lenders, which would often raise the fee for more adverse cases, were encouraging brokers to offer the wrong mortgage to customers.

He says: “They were effectively providing an incentive to brokers to place business on a wrong deal. Most brokers would have been professional enough not to do that but there would have been some who would have found a reason to place the business on heavy adverse terms.”

Money Marketing has seen product guides from several sub-prime lenders published in 2007, including Southern Pacific Mortgages, DB Mortgages, Rooftop Mortgages, Advantage and Money Partners.

At the extreme end of the scale, Rooftop Mortgages were offering heavy sub-prime deals which specified that a borrower could apply with no limit on the number or value of county court judgments and with no limit on arrears in the last 12 months.

The lender was offering deals of up to 75 per cent loan to value, with rates starting at 8.44 per cent for a two-year fix. The Libor rate at the time the guide was printed, in August.

Boulger believes this sort of pricing is inadequate, considering the risk of the loan. He says: “Those people are going to be paying a rate which is less than quite a lot of building societies. You could argue they got a very good deal but also that the lender was not pricing adeq- uately for risk.

“What was happening in that market was there was a lot of competition and some of the pricing reflected the fact that the lender wanted to do a certain amount of business and was prepared to compete with other lenders and charge too low a rate.”

The other lenders mentioned would typically allow four arrears payments in the previous two months and between £10,000 and £20,000 in CCJs.

Clark says lenders should not have been lending to people in such a vulnerable position.

He says: “You probably should not be lending to people who have missed five or six payments in the last 12 months.”

Given the FSA’s push over the past few years to stamp out reckless practices in the mort- gage market, it has surprised some to see the regulator did not try and intervene.

Bill Warren Compliance managing director Bill Warren believes the FSA should have stepped in earlier, but says it was not in a position to investigate lending in this section of the market.

He says: “Unfortunately, I do not think the FSA had the resources at the time to be able to get in and have a look properly. And, of course, that part of the market had very few complaints because people were desperate for credit. In the broad scheme of things it probably could have and should have been doing more.”
But Telos Solutions director Richard Farr says: “The regulator has always stated that it is not a commercial regulator. It would say it is up to lenders how to price their products.”

The FSA admits the current regulatory structure was inade- quate and says the MMR was introduced for that reason.

A spokesman says: “We recognise that the existing regulatory framework was ineffective in constraining particularly risky lending and borrowing and that is why we launched the mortgage market review in 2009.

“Since then we have significantly shifted our strategic direction and have started reforming the mortgage market so it is sustainable for all participants.”

Recommended

2

Sants says sorry for ‘20% acceptable loss of IFAs’

FSA chief executive Hector Sants has apologised for saying that losing 20 per cent of advisers as a result of the RDR is acceptable. Giving evidence to the Treasury select committee last week, Sants said he had not intended to cause offence at an evidence session held in November but was laying out data from […]

7

FSCS to recoup Keydata compensation paid to N&P customers

Norwich & Peterborough Building Society is to repay the Financial Services Compensation Scheme for payments the scheme has already made to N&P customers who invested in Keydata products. Money for the FSCS payments will come out of the £57m provision set aside by N&P to pay Keydata Lifemark investors. The FSCS says it is “considering” […]

Nigeria cover image - thumbnail

White paper — Nigeria International Insights

Jelf Employee Benefits closely examines healthcare provision and challenges within Nigeria. This will be of particular interest to HR decision makers with employees based in Nigeria, and assesses the environment, risks, facilities and safeguards that are relevant to organisations that are actively deploying expatriate staff in this location.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com