Further tightening of lending criteria as a result of the continuing fallout from the US sub-prime crisis could mean that balance-sheet lenders will be forced to move in line with the funding market to ensure they are not overexposed, claims Accord managing director Linda Will.
She says it would take only two or three players to wind down their market presence for other lenders to be overexposed in terms of market share.
This comes after GMAC-RFC last week considered withdrawing its sub-prime products over 75 per cent loan to value but decided to keep the present criteria.
Other lenders, such as Platform and Mortgages plc, have recently made significant changes to their criteria, including reducing LTVs from 95 to 90 per cent.
Will says: “Balance-sheet lenders are, in principle, unaffected by the US sub-prime crisis but we will have to react if securitisation lenders continue to tighten criteria. A lot of lenders will be watching to make sure they will not be the only one on the merry-go-round with high loan-to-value ratios.”
She says it would be dangerous to be the lender “left holding the criteria baby”.
But London & Country mortgage specialist James Cotton says he hopes that lenders will try and hold their rates and criteria as much as possible.
He says: “As a broker, we would like to see some lenders not increase their rates as much as others. It could provide them with a good opportunity to get some extra business in and build market share.”
However, Cotton admits there is a flip side to not raising sub-prime rates. “If there are only a couple of lenders out there left picking up business, they could end up being the target for the more risky end of sub-prime business. It is all about getting the balance right,” he says.
Savills Private Finance director Melanie Bien says lenders which do not choose to tighten criteria might have a significant advantage in being able to build up market share.
She says: “You might find some of the smaller balance-sheet non-conforming lenders might hold out in order to build up their book of business if they have not done so well in the first half of the year. The key thing for lenders is how long can they hold out in this current climate?”
Hamptons managing director Jonathan Cornell thinks balance-sheet lenders will increase rates and change criteria, not because they are overexposed but because they do not want that much business. “If they are happy to lend now, they will be happy to lend in three months time,” he says.
But Alexander Hall chief operating officer Andy Pratt says he struggles to understand why balance-sheet lenders would have to follow securitisation lenders in changing criteria.
He says: “They are different. On the one hand, you have got lenders concerned about securitisation, which is more of a selling issue. Essentially, they have to close the door until they are confident they can sell their book of business on but a balance-sheet lender just does not have the same issues.”
Pratt says: “I do not think it will be a heyday for balance-sheet lenders. They might actually decide to use the current climate to improve their margins.”
However, Pratt does not think many balance-sheet lenders will change their criteria significantly.
Cotton says: “I think it will be a shame if everyone follows the wholesale funding market. It would be good for customers to have some options out there. The whole move at the moment is really to get rid of the most risky, heavy stuff.”
He says lenders that are still offering good sub-prime rates include Accord, BM Solutions and mutuals such as Godiva, Scarborough Building Society and Amber Homeloans.
Brentchase Financial Services mortgage specialist Mike Fitzgerald says balance-sheet lenders sound quite happy with how things are going at the moment.
Fitzgerald says: “It is really only the lenders that securitise that are having a few problems at present.”
He suggests that the market could see some prime lenders testing the water in the sub-prime market. He says: “Obviously, they would have to be careful in their approach but they would be in a much stronger position to dip their toes even more, especially with the lower LTV products.
“I really do not think the current situation is going to cause too many problems for balancesheet lenders. The next six months are going to be better for mutuals, deposit-takers and banks and they will be in a much stronger position but it is definitely going to be a rocky road for the rest of the year for securitisation lenders.”