Like it or loathe it, target it or turn away from it, you simply cannot ignore the non-conforming market.
More than eight million people have had difficulty getting credit from high-street banks and other lenders because their history falls foul of lending criteria.
The non-conforming market has grown up and it rep-resents a huge segment of the industry and also a major income area and value-adding segment for professional intermediaries.
Most brokers are aware of the rewards to be earned if they can conquer this niche and most are aware of the reasons why not many have tried. With the lack of available product information and the uncertainty surrounding compliance, there is little surprise that many intermediaries choose not to enter this market. Perhaps there is even an element of fear about making a recommendation.
But there are several factors which should encourage intermediaries to reconsider this area and develop it into a significant proportion of their business.
First, there is the issue of falling profit margins. Talk of margins is typically associated with lenders. However, brokers too are finding that their business profitability is being adversely affected by the loss of endowment commission and the move from personal pensions to stakeholder.
Lenders will target the problem of falling margins by attacking the cost in providing these loans or bring in borrowers.They will also look to cut the cost of servicing the loans by gaining more efficiency, which may be because of better use of technology. For brokers, the answer could lie in more profitable market sectors.
Another factor, as stated above, is the size of the market. No intermediary likes to turn away potential clients but many did simply because of the hassle, or perceived hassle, associated with arranging these mortgages.
It is never easy – and seldom wise – to generalise about market segments but these people will rely on the help and guidance of professional intermediaries. They often simply do not know which way to turn and can have their case declined because of admin inefficiencies.
Sometimes the most minor of issues can create massive obstacles. Moving address too often, changing a credit card too often or missing months in bank statements can all be resolved but can prove very damaging. When a borrower has a slur on their credit history, the problems can seem insurmountable.
Whatever the cause of bad credit history, eight million people represent a huge market for lenders and advisers. The non-conforming mortgage sector is an exceptionally profitable business and grew by around 19 per cent last year with gross lending almost 6 per cent of the total mortgage market.
The increase in the number of self-employed people has brought an improvement in the quality of applicants.
Even so, this market is still seen by many lenders and IFAs as a specialist area because traditionally there have been many difficulties associated with servicing it.
The biggest problem has been in the admin and distribution although there seems to have been a move from a peripheral to a central proposition in the marketplace.
The collection procedure of the necessary information has been called complex, cumbersome and lengthy by the small but growing band of IFAs and mortgage advisers that specialise in this area. It is costly and inefficient owing to the fact that lenders' criteria can vary wildly, making the application process much less scientific than brokers and borrowers would like.
Recent research suggests that up to 75 per cent of all applications require further information. This causes time-consuming communication between intermediary and lender that not only delays the process but can also result in borrowers being gazumped.
Adding another layer of complexity, bad credit usually makes the process worse. It is no surprise that many brokers and IFAs do not provide solutions for people with bad credit as the hassle it involves outweighs the possible increase in earnings.
What can be done? The FSA seems to be widening its scope. Can it move swiftly to alleviate some of these pressures? We will wait to find out.
An initiative is being provided by lenders as they address two priority areas.
First – lending criteria. The tools used by lenders to assess credit need to be made transparent and the reasons why loans are declined need to be made clear.
If lending criteria becomes uniform, then the obstacles relating to bad credit would become easier and cheaper to overcome. The public, as financial consumers, are becoming much better educated and will not put up with secrecy any more. There is no issue with varying methods of calculating a final rate, whether based on segmentation or layering of basis points, but it must be transparent.
Second, the lenders and intermediaries need to embrace technology.
The regulation covering mortgage lending is becoming an admin burden. Twelve signatures from a borrower is not uncommon. Lenders can apply pressure to the regulator but cannot change its mind. What they can do is make the areas they control easier.
Most mortgage brokers and IFAs use technology in some form or another to get information about interest rate changes but revert to paper and the Royal Mail for the application process itself.
Direct online communication between lender and adviser would speed up the application process, saving time for all involved, particularly the customer who is left agonising over the outcome.
The internet can reduce the time taken when problems occur. Both lender and adviser will be able to match borrower criteria with lender criteria quickly.
Online communication can allow an application to be credit-scored there and then, providing approval in principle. If normal lending criteria were made open, a gen- eric application can be submitted online, that is, credit-scored immediately.
Where bad credit is involved, the “deals” offered by lenders can be compared on a level playing field and the borrower can make an informed choice, knowing in principle that a loan would be accepted and how much extra they would be asked to pay.
The technology already exists to make this happen. Companies are beginning to accept online communication. Getting a mortgage can become easier. Borrowers can concentrate on the most important factor when getting credit – how much it will cost.
The non-conforming sector has definitely come of age and all intermediaries are invited to the party.