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Lender benders

Just a few years ago, the mortgage lending parameters seemed clear cut. Mainstream lenders accommodated uncomplicated borrowers with a standard source of income while the sub-prime lenders dealt with the problem cases who had a poor credit history and did not conform to any stereotypical template.

However, the dynamics of 21st Century life have spurred a transformation in business approach, causing the hitherto black-and-white mortgage lending landscape to converge into shades of grey.

One reason for this market blurring has been the fallout from the financial turbulence of the late 1980s and early 1990s which tainted many unblemished personal credit histories with county court judgments, defaults, bankruptcy orders and individual voluntary agreements.

The concept of a job for life has become obsolete. Instead, today&#39s borrowing population consists of a substantial proportion of people opting to work for themselves. Equally, trends for short-term or seasonal contracts continue to be strong.

With the poor performance of equity markets, property has rocketed in popularity as an alternative source of income and a lucrative longer-term investment opportunity, resulting in the buy-to-let boom.

The coalescence of these trends meant that a sizeable chunk of the working population was effectively excluded from mainstream sources of borrowing and faced extremely limited mortgage options. Much of this was due to their inability to prove their income in a way that satisfied mainstream requirements.

What has been evident for some time is that sustainable business growth is achievable even as the boundaries between mainstream and specialist lenders begin to blur. In response to burgeoning market opportunities, the specialist lenders have been able to adapt relatively easily to accommodate the disappearance of defining market parameters.

One of the key benefits for most specialist lenders is their ability to operate efficiently without having to use the sometimes inflexible credit-scoring techniques favoured by the mainstream lenders.

In common with other specialists, we at igroup have worked hard to develop and refine a risk-appraisal methodology that requires each new application to be assessed on its own merits. This can be time-intensive compared with automated credit-scoring. Our extensive experience tells us that many modern consumers need to be judged using a more complex set of financial indicators.

The specialists have also been quick to develop and market a range of mortgage products with wider appeal. By doing so, they have gradually aligned their rates with the mainstream.

These new portfolios are far removed in scope and diversity from the original adverse-credit-biased offerings of a few years ago and are much more relevant to today&#39s wide variety of lifestyles and borrowing profiles. Such products include complex-prime, near-prime, credit-repair, buy-to-let, right-to-buy, self-certification, light-adverse and medium-adverse loans. Our own near-prime base-rate tracker product – Gem 0 – starts at just 0.75 per cent above Barclays Bank&#39s base rate.

It is small wonder that our lending colleagues in the high street have cast covetous eyes on the specialist borrowing sector. But, as the high street has found, it is neither easy nor cheap to set up an operation that is fundamentally different in its approach to risk assessment.

Moreover, it takes years to assemble a team of sufficiently qualified and experienced underwriters able to manage and understand this approach. Many household names have resorted to acquisitions to make their entry into specialist lending.

Given their higher profiles and reputations, mainstream lenders have helped impart a level of kudos and authority to the changing market. A recent Datamonitor report on non-standard lending theorises that the status and credibility of the non-standard lending market has been improved by the entry of mainstream providers – a fact that cannot be denied.

To gain greater clarity on this aspect, we asked intermediaries to compare mainstream and non-standard lenders in terms of their innovation and discovered that 94 per cent found non-standard lenders to be more innovative on the whole, particularly in relation to specialist underwriting criteria. This evidence suggests that the primary value that mainstream lenders add is image while existing specialist lenders possess the necessary vision required by the market to accommodate the wider needs of borrowers.

Take self-certification as an indication of specialists&#39 innovation. Self-certification is an essential process of income verification and is an invaluable alternative for contract workers and entrepreneurs who would otherwise have limited borrowing options.

Of course, underlying its appropriateness is the need to reach a reasonable and balanced assessment of affordability between intermediary, lender and borrower. As such, specialists have developed steadfast techniques and built up necessary experience to judge applicants realistically against their ability to repay.

Hand in hand with the rate of change occurring in the market, the socio-economic profile of the non-standard borrower is becoming harder to pinpoint. Historically, this borrower would be defined as a semi-skilled, unskilled manual or casual labourer – the definitions relating to the D and E socio-economic categories and the primary groups identified by Datamonitor as representing the specialist market. Yet the perception of this outdated stereotype of the non-standard borrower is being called into question.

The socio-economic spread is becoming far wider and more balanced as standard definitions no longer apply. Intermediaries report that only 26 per cent of their customer base belong to groups D and E while 74 per cent fall into categories C2 and above. While 27 per cent report that they have no borrowers in socio-economic group E, only 3 per cent have no borrowers in group A.

All these points lead to cyclical growth and development, which undoubtedly benefits all parties. We are currently seeing lenders on both sides revising their business models and diversifying their approach to reach out to borrowers who were previously uncatered for.

As mainstream lenders move into this market through acquisition, which in turn brings new credence to specialist lending, and as existing specialists demonstrate vital expertise and skill base, more borrowers with atypical financial profiles are experiencing growing choice and greater borrowing flexibility.

In essence, the blurring is actually leading to a more flexible and transparent future for the market.

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