There have been panic articles in the media lately, predicting the UK sub-prime mortgage market was about to crash following the US downturn.
It was a major economic event in the US but many commentators have rightly explained why the UK is unlikely to experience the same. It is true that interest rates are rising and competition in the mortgage market is fierce but that would not cause a collapse in itself.
It is the irresponsible attitude of sacrificing lending criteria to boost volume and a resulting deterioration of loan books that can cause problems.
In this context, Matthew Wyles argued last week that UK businesses relying on securitisation are based on a precarious model and that particularly sub-prime businesses might not survive in the event of a market shock.
This might have been the case in the US but it is inappropriate to argue this way in our market and to refer to edeus in this context is simply not correct. We are a specialist lender operating across all main sectors like buy to let and self-cert in addition to sub-prime.
It is a fact that diversification is a way of spreading the risk of market contraction and making businesses more adaptable to problems.
Just like multiple routes for origination and exit strategies help to spread business efforts across the market. These are things that successful lenders do consider before venturing into the market.
On a similar note, a crucial factor for success is to identify a realistic volume target that will bring value to the company. It makes more sense to sell fewer mortgages with a profit than more with a loss. It is not uncommon for businesses to loosen criteria in chasing volume and historically building societies and balance-sheet lenders have done this on a large scale.
The problem is that, by doing that, lenders are ultimately weakening the performance of their loanbooks.
When running close to the edge, a market shock could be lethal. Therefore, strong and confident credit policy is the goalkeeper of a business and the goal should be to chase value, not volume.
The value of a strong and good brand is often overlooked. Marketing is equally important as direct-sales efforts and it helps to drive the business straight from the steam engine’s cab. Ultimately, it is the right people and their skills that will create a strong and credible company.
Investors are willing to invest and buy from businesses built on a sound foundation and we should not forget that the UK is the second-biggest receiver of foreign direct investment in the world for a reason.
There is nothing wrong with securitisation. It is common business practice based on smart calculations of smart people that know what they are doing. It is naive to assume that any lender, whether specialist, sub-prime or mainstream, would not anticipate deterioration in asset quality in its business plan.
For those in the higher-risk sector of sub-prime, getting these calculations right is particularly crucial. Those that did not are set to fail anyway – with or without a shock.