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Dead cert

The growth in the number of lenders in the self-certification sector has come about partly as a result of a greater understanding of the risks involved but mainly as a result of the search for profit margin.

Quite simply, the profits existing in the mainstream sector over the last few years have been marginal at best and self-cert, on the face of it, offers better margins in exchange for the slightly higher risk.

The problem, as in any market, is that as more lenders have entered, competition has increased and rates as a result have fallen dramatically.

Rather than enjoying margins of 1 per cent or more over equivalent mainstream schemes as a couple of years ago, the best self-cert rates are now comparable with the average mainstream rates.

While competition is one reason why rates have fallen, there are also other more complex factors at work. As more lenders have entered the fray, the comfort factor has increased, as lenders have become more skilled in assessing and understanding the risk involved.

Much of this is to do with increasingly sophisticated risk assessment whereby lenders can more accurately predict the likelihood of default.

The main test though has been mortgage arrears – a lender&#39s number one consideration. These remain very similar to mainstream – at historically low, manageable levels.

The self-cert market is now rapidly reaching maturity and with it comes a number of questions about its future direction.

In the mainstream sector, a much greater understanding and acceptance of risk, increased use of credit-scoring and the need to gain market advantages over competitors is starting to affect the self-cert market.

Much of the change is being driven by the need to improve service in the mainstream market.

With mainstream rates incredibly low, the battle for business in the future is increasingly going to be fought out as much on service and flexibility as it is on rates and products.

Lenders have long realised that to improve service you need to remove as much of the paperwork involved in the lending decision as possible.

Credit-scoring assessment of cases has now meant that increasing numbers of lenders are able to assess the risk, taking into account factors such as the level of deposit that a customer is putting down. There is little point collecting employment references or P60s and pay slips when all the factors indicate a very low lending risk.

An increasing number of mainstream lenders are now promoting the fact that up to 75 per cent loan to value or in some cases 80 per cent LTV, they will no longer (in most circumstances), ask for proof of income. While this is being promoted by some as “self-cert” on mainstream products, it is different from the more traditional understanding of self-cert in that the “no ref- erence” rule often only app-lies for cases passing higher-level credit scores.

At this stage, all lenders offering this reduced reference facility are also covering themselves with phr- ases along the lines of “we reserve the right to seek references if we feel the lending risk warrants further investigation”, etc. Not something you are likely to see in the small print of a traditional self-cert product.

Although the move towards reduced or no referencing below 75/80 per cent LTV is not going to take all the self-cert market away below this level, it is certain to have an impact on a number of cases currently going down the traditional self-cert route.

Self-cert lenders have started to respond both to the above threat and to the increased level of competition in the self-cert market by moving the boundaries of criteria into more risky areas.

For example, in the last few weeks, two major players in the self-cert market have announced they will now offer self-cert lending to 90 per cent LTV, up from 85 per cent LTV.

There have also been moves by many self-cert lenders (no doubt spurred by mainstream products eating into this sector) to define exactly what they mean by the term self-cert.

Many self-cert lenders are now emphasising that they “will not do any checks at all to validate the stated income”.

While the whole idea of self-cert is not to seek income confirmation, there is a concern that if the income stated is being used to determine borrowing, there needs to be some form of validation or “sense check” that the income is at least believable.

While self-cert products originated for people who cannot conform to many mainstream lenders&#39 requirements, due to perhaps unusual circumstances, there is an increasing concern that many traditionally employed mainstream clients are using self-cert as a way of borrowing more money than a lender would normally deem prudent, should their true income be known.

While income on self-cert is not subject to a check (other than perhaps to make sure it is realistic for the occupation stated), most lenders still require applicants to state their income on the application form. This is then subject to income multiples to determine the total borrowing. Put income multiple requirements together with no income checks and the temptation for customers to inflate earnings is all too real.

The above begs the question that if you are asking people to state an income which (a) you are not going to check as a lender and (b) the customer may be inflating and cannot prove to your satisfaction anyway, why ask the income question in the first place?

Some lenders will say they need an income stated so they can be shown as having taken a responsible lending decision. This has an element of sense but many customers and brokers are unhappy about stating income they know they cannot prove.

In addition, most people know that income mult-iples are often a rather crude way of assessing affordability and risk.

An alternative approach is to avoid the income question altogether and make an assessment of the individual based on their credit profile, their occupation/occupation history and borrowing record.

The increasing availability of in-depth credit data, coupled with continually improving credit scoring and risk assessment, should allow more lenders to evaluate borrowing in more imaginative ways.

As the self-cert market matures and credit systems and risk assessment continue to improve, the self-cert sector is likely to extend its scope into new areas. Without change, much of the market risks being gradually absorbed into the mainstream.

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