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Adverse conditions

Sub-prime mortgages have traditionally been regarded as the dirty end of the market, catering for customers on the breadline who no one else will touch.

But reputable lenders have brought mainstream values to the market and it has grown considerably over the past couple of years.

With regulation and an increasingly competitive business environment, brokers and lenders need to make the most of every revenue stream.

Many non-conforming lenders have targeted the light-adverse sector in the past year after identifying it as an area likely to grow considerably. Light-adverse products are for people who fall into the gap between traditional high-street lenders and non-conforming lenders.

More borrowers are being turned down by traditional lenders because of their poor credit ratings as changes in lifestyle make it easier for customers to slip into light adverse.

Divorce and redundancy are increasing and can radically alter a customer’s finances in the short term. Other people might have a poor credit score because they do not appear on an electoral roll or have had several jobs or lived at a number of addresses in a short period of time.

Many people have minor forms of adverse credit such as small county court judgments or mortgage arrears. A report from Datamonitor estimates that 21 per cent of the mortgage market is non-standard.

Not many people will spend their whole lives in prime credit as most will experience a financial blip at some point. It could be that they fall into sub-prime for only a year or so and are back in the mainstream market in a short time but it is vital that intermediaries equip themselves to help clients with past or present credit problems.

Brokers must remember that they are dealing with the same customers as before from the same socio-economic classes and with the same jobs but that some have experienced financial ups and downs.

The surge of lenders entering the market means that there are many differing types of product and this can prove confusing.

For example, some len-ders segment and divide credit-adverse customers and offer different rates and products to customers who have 1,000-worth of CCJs than to customers who have 5,000-worth of CCJs.

Other lenders might offer the same rates to customers across the board, whether they have 1,000-worth of CCJs or 5,000-worth of CCJs, and it is debatable as to which approach is better. Some lenders with just one product can be competitive across the board while another lender may just be competitive when a customer has, say, CCJs of 3,000 or more. It is a broker’s job to find out which is the best product for the customer and this can be a daunting task.

Brokers might think that the process for sub-prime customers is more complicated and time-consuming than for mainstream customers as they must class-ify credit-adverse custom-ers into light, medium and unlimited adverse but that does not have to be the case.

At BM Solutions, the one-minute mortgage will tell brokers how much we can lend a certain customer, at what loan to value and whether they fall into sub-prime. KFIs will then give brokers and customers more information about the products suitable.

We aim to offer a minimum of four products to each customer and bring mainstream values to the sub-prime market.

Many brokers send sub-prime cases to a packager as they think they are too tricky and time-consuming to tackle themselves. This means brokers lose control of the case and the information given.

Regulation has seen costs rise and possibly the loss of some revenue streams such as general insurance for some mortgage brokers. Sub-prime cases are often not as complicated as brokers think and with the launch of online services, it is much easier to go direct to the lender and secure the valuable sub-prime lead.

The FSA will be looking closely at the sub-prime market in the future and will be looking for fairer, transparent products. This will prompt lenders to make products easier to understand and make life easier for intermediaries and better for the consumer.

In time, all lenders will hopefully adopt these practices and a less than perfect credit history will not be a barrier to customers or intermediaries.

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