Ihave spent the last couple of months, following my transition back to a lending environment after 10 years in distribution, having a close look at the market and its trends. My overriding impression is that we are on the verge of another period of significant change in the industry, the key words for which must be integration or perhaps fusion.
We have for years been using, albeit ill-defined, categories to divide the market by credit. Although on the securitisation front, these definitions are becoming, if anything, harder in the retail market, the boundaries are increasingly blurred.
Fed by the competitive need for product differentiation, there is increasing crossover between the non-conforming and prime marketplaces. A number of non-conforming lenders are getting much closer to genuine prime although in most cases the assertion that they are doing real prime lending is false.
At the same time, the major prime proponents are finding new ways to participate in the non-conforming market. The reality is that as one sector learns the strong points of each other, credit is already destined to become a seamless curve rather than the step function that we see today, with pricing moving accordingly. Today, we now see examples where non-conforming lenders are becoming relevant in the prime market simply because of their broader views on income multiples and greater risk appetite.
Specialist lenders are starting to learn from the more sophisticated approach to affordability taken in the prime market and this will help the ultimate fusion of the two markets and accelerate the specialist lenders’ ability to compete more actively in the prime market.
There are corollaries between lenders’ back books and our global oil reserves. For a number of years, everybody has said that they are both running out. The stark reality is that we can now see this happening. Retention programmes notwithstanding, the relative lending volume of SVR-based borrowers is starting to decline alarmingly.
The end game, when these subsidies no longer become available, will be a new market where long-term value becomes a key sales point with much depleted new business incentives available. In this world, the securitisation market may well come back into serious play as a prime funding medium rather than auxiliary to the traditional lenders’ funding. In this world, the lowest-cost producers become king.
History suggests, therefore, that because of their intrinsically more advanced systems, lower cost base and lower fixed distribution costs, the new lenders will increasingly play competitively in the prime market. At this point, brand comes a poor third to price and service efficiency in the borrower’s and intermediary’s mind. So, while in the face of global warming, our Government has elected for fission, for our market, elect for fusion if you don’t want to run out of power.
Mark Chilton is managing director of Homeowners Mortgages.