Sub-prime specialist lender Southern Pacific Mortgage is set to introduce a light adverse mortgage, believing the market has huge potential.
The new product will be rolled out on December 1 and director of credit Stuart Aitken expects large amounts of interest. He predicts it could eventually account for up to 25 per cent of SPML's total business.
Aitken says: “We are not really tapping the light adverse market at the moment. Our current product is flexible and we are only doing about 5 per cent of our business on it.”
Light adverse falls between traditional sub-prime and prime lending. Aitken describes a typical customer as someone with a couple of county court judgments or a missed mortgage payment from a while ago. He says this sort of customer is not a bad bet for a lender to take on as far as credit risk is concerned.
SPML is also looking closely at the Government's key workers initiative. Aitken believes that the more lenders that get on board, the better.
SPML is the third biggest sub-prime lender in the UK but has had a chequered history since its launch in 1996. After trading successfully until the end of 1998, its parent company Southern Pacific Funding Corporation filed for Chapter 11 bankruptcy in the US. Aitken says this led to a loss of financial clout for SPML, which was forced to close its doors to new lending in July 1999.
However, Aitken says the team remained confident that they would be able to reginite their relationship with intermediaries and packagers.
“Instead of outsourcing on the operational side, as Kensington did with HML, we listened to intermediaries who told us that this harmed Kensington's service, which took longer to get to offer and then to completion. So from the start we did the front-end processing ourselves.”
He says SPML does not want technology to take over the human interface with intermediaries.
SPML was relaunched in January 2000 with the backing of Lehman Brothers. The company has grown considerably since doing £175m of business in 2000 and is on course lend £1.8bn this year.
The lender started out with a sub-prime product which still accounts for 50 per cent of its lending. In February this year, SPML took its first step into the prime market, which Aitken says now accounts for 30 per cent of its overall lending. The product is set to reach £460m in completions by the end of the year – four times its target.
SPML offers the possibility to self-certify income across a range of its products. Aitken says there is a huge market out there for self-cert and is not at all worried about repercussions from the BBC programme which revealed advisers encouraging borrowers to falsify their incomes. He says: “We have an underwriter talking to every single self-cert customer before the loan is agreed. If there is any doubt at all about the reasonableness of the income stated, then we might do more, for example, talk to their accountant or employer.”
He is also positive about self-cert for employed borrowers, despite murmurings from the MCCB that this might not be appropriate. He believes it helps to shorten the lending process and cut costs for the lender, which does not want the bother of getting documentation from the employer.
Aitken sees a future where lenders use data from credit reference agencies, which can work out the likelihood of whether or not a loan is affordable for a particular consumer, to cut out the need to check on income. He says: “This is not to say the lender would not be checking on the loan but it would be easier than getting a statement of income from an accountant or employer.”
He admits that there is a potential for abuse at the edges of the self-cert market but is confident that there is no problem with the product itself, saying it is the abuse that should be dealt with.
Almost 50 per cent of SPML's business comes through packagers, which will not have to be regulated come October 2004.
Aitken says: “It could be a risk if we get to a situation where we are doing business with an intermediary who is not authorised. We cannot have a situation where the consumer is going into a regulatory black hole with a packager and coming out with SPML. The regulator might look on us as being responsible were any problems to arise. In this case, I think we would end up having to oversee the operation and treat the packager like an outsourced front-end operation.”
Aitken says SPML is determined to help those intermediaries who wish to become directly authorised by the FSA next year and he is hoping to set up workshops next March to help those who have not yet completed their application form. “It is really important that brokers get this right as I am sure those who make mistakes the first time will not be viewed in a positive light by the FSA.”