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Stretching the point

The future growth of sub-prime and non-standard lending will be

influenced more by the uncertainty of Britain&#39s overall economic

climate rather than any collapse caused by consumer income-stretching

or the entry of local mainstream or foreign players.

Last year, the UK&#39s non-conforming lending population decreased to an

estimated 7.8 million adults following an apparent five-year trend.

Conversely, financial analysts Datamonitor believes the non-standard

mortgage market has increased at a compound annual growth rate of

19.8 per cent between 1998 and 2002.

Amid this changing tide for the non-conforming market, arguments over

the pros and cons of self-certification have overflowed into the

threat of possible income-stretching by consumers.

But even in the face of lower populations with bigger debts, many

mortgage brok-ers believe that income-stretching through

self-certification lending is not a widespread problem.

Recent research by non-standard lender Igroup purports consensus

within mortgage intermediary firms on the issue of income-stretching.

Igroup communications manager Bob Sturges says: “Our research

suggests that brokers, lenders and borrowers more often than not

reach reasonable and balanced assessments of affordability.

Income-stretching is not perceived as a problem.”

This is in contrast to figures outlined in a Datamonitor report

claiming that income-stretching is a “timebomb waiting to explode”.

Riding on the back of the Datamonitor report, Igroup&#39s survey of 33

mortgage intermediary firms found that 67 per cent of brokers

disagree with Datamonitor&#39s “timebomb” analogy although Datamonitor

itself has been quick to qualify its statement.

Financial services analyst Alex Boorman says: “The national press has

emphasised income-stretching but we are eager not to overplay the

point. Some consumers will struggle because they have over-stretched

themselves with sub-prime and non-standard lending but to say that

this will be an across the market problem is foolhardy.

“Although self-certification conceivably could lead to mis- use

and/or misselling, it is clearly an invaluable alternative for

contract workers and entrepreneurs in the selfemployed sector who

would otherwise have limited borrowing options.”

Additionally, brokers seem unperturbed at Datamonitor&#39s suggestion

that more financially aware consumers will mean that lenders will be

more likely to go directly to the consumer rather than operate

through intermediaries. Only 19 per cent of brokers surveyed felt

this represented a threat to their future business.

Sturges says: “It is more likely to have exactly the opposite effect.

Unlike mainstream providers, non-standard len-ders tend not to have a

high profile with consumers. I do not think there is a major shift in

lenders wanting to go to the consumer. It is a model that is not very

plausible in the present market.”

The argument is that the more financially aware the consumer, the

less likely they are to approach sub-prime and non-standard lenders

directly, understanding the need to use a broker for negotiation and

tailoring a solution.

Sturges says: “Although sub-prime and non-standard products may not

be too complex, individual consumer&#39s situations can be incredibly

complex, making the provider-direct proposition unattractive to most


It is this complexity that in the past has limited new ent-rants to

the sector and many believe it will continue to be a stumbling block

for prospective entrants.

Boorman says: “The UK sub-prime market is very sophisticated, making

it hard for outsiders to enter. US players have tried with limited

success and European entrants will face similar barriers. This has

also meant that mainstream UK providers for the most part have sought

to enter the sub-prime market via acquisition rather than direct


He contends that mainstream provider entrance into the sector has

done a lot to provide a greater sense of legitimacy to the sub-prime

and non-standard market, which has always struggled with a shadowy


Boorman says: “The ent-rance of mainstream lenders such as Nationwide

and Halifax has provided a certain level of credibility to the


Sturges agrees that mainstream lenders are helping to improve the

profile of the sector. However, he draws a line in the sand,

maintaining that so far they have done nothing innovative in their

product offerings.

He says: “Non-standard len-ders have always had to be highly

innovative to cover risk. But innovation in the industry has come

from non-standard lenders rather than mainstream entrants. Our

research has found 94 per cent of brokers believe non-standard

lenders on the whole to be more innovative. This suggests the only

value that mainstream lenders add is image and reputation while

existing specialist len-ders possess the particular skills and vision

required by the market.”


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