With technological developments, the way in which intermediaries transact mortgage business may be very different in the future.
Technology is proving to be a real catalyst for change, especially in the non-conforming mortgage sector. This sector grew by around 19 per cent last year and will continue to grow due to a wide range of factors. Perhaps the biggest factor has been technology or, more specifically, the growing use of credit-scoring systems.
A lender's aim is usually to maximise volume at minimum cost with minimum risk. To reach such an objective, many lenders have developed cost-effective credit-scoring systems to assess the applicant against a number of fixed measures to determine the future risk of customers in terms of repayment and default.
With credit-scoring systems, the lender relies on information gathered by credit-referencing agencies, in combin ation with data it gathered during the application process, who collect data on individuals such as previous add resses, records of CCJs, details of other credit agreements and records of any previous sear ches. It also collects:
Information on payments from their credit account inf ormation-sharing scheme, called CAIS by Experian and Insight by Equifax;
The implications of postcode on risk assessment which depends on comparing the electoral role with census information, called Mosaic by Experian and Fruits by Equifax.
Information from their Detect scheme aimed at fraud prevention, where inconsistencies between past and present applications are monitored.
While the agencies gather the information, it is the lenders themselves who combine this with their own details to develop credit scores or risk ratings for borrowers. Each system is unique to the lender, but all yield similar results, avoiding the same types of risk and making the lending decision swift and economical.
It is through such systems that the automation of the lending decision process has developed, creating a market of potential borrowers who are rejected because they are deemed to represent a higher risk. Yet in truth, many of these borrowers will represent good credit risks.
As a consequence, we have seen the emergence of many specialist (non-conforming) lenders which are able to lend to borrowers deemed too high a risk by others. They can do this by examining each application on its own merits and assessing the borrower's ability and intent to pay.
With more and more borrowers failing the credit-scoring systems, the non-conforming market has grown. But why would someone fail the credit-scoring?
There are many reasons. The two most common reasons are a record of county court judgments within the last six years and being self-employed.
In addition, those who move home frequently bec ause of their work may be excluded through lacking a long-term home address, as can those working on short-term contracts because of their lack of job security.
Aga inst these sorts of risks presented by people who do not fit into the “ideal” credit-scoring pattern, there are those who have impaired credit histories, such as mortgage arr ears or CCJs, and those with no credit history, perhaps not having a credit card.
As technology becomes more sophisticated, creditreferencing agencies will be able to capture more information on borrowers, as in the US. As more information is held, we will see even more borrowers fail credit-scoring systems and be refused a mortgage.
Fortunately, specialist lend ers can look beyond the statistics and take a more threedimensional examination of the borrower.
For example, they will look at the reasons behind a CCJ and if the reason was more a blip than a trend, perhaps due to a divorce, redundancy or long-term illness, then the borrower may be a good risk.
Non-conforming lenders are filling a gap left open by traditional lenders which prefer a more automated approach to risk assessment. As technology improves, credit-scoring systems will become more efficient and so this gap will widen.