View more on these topics

Sub-prime numbers

Traditionally, the market factors that any mortgage adviser will immediately recognise as non-conforming, sub prime or adverse credit within an applicant&#39s credit profile are – arrears, county court judgments and bankruptcy/individual voluntary arrangements.

Conventionally, these have been the measure of an applicant&#39s credit risk, with, for example, an applicant who has had some arrears in the past being viewed as a lower credit risk than one who has been bankrupt or has had several CCJs amounting to several thousands of pounds.

Many lenders define their products or schemes, at least in part, in terms of the levels of missed mortgage payments, value of CCJs, or discharged bankruptcy/satisfied IVA that an applicant has.

The published statistics on these factors should make it fairly straightforward for lenders and brokers operating in the sub prime/non-conforming sectors to review volumes on an ongoing basis to understand whether this market is in growth or decline and then base their future business plans on these firm estimates.

However, there is a problem, in that indicators such as CCJs and bankruptcy are not an absolute measure of the growth or decline in overall credit-worthiness within the non-conforming mortgage market, they are simply a measure of how far creditors are prepared to take legal action against their debtors.

Currently, where a more conciliatory attitude to debt recovery is being encouraged, we can see some of the indicators for credit risk decreasing while other indicators are growing. So it seems that judging the size and shape of the market in future may be problematic.

CCJ levels over the last eight or nine years are a prime example. In 1993, 1.8 million CCJs were registered. The 90s started with bank base rate at nearly 14 per cent – almost double that of two years previously – with the housing market in recession and a lot of people having debts they were unable to repay, if CCJ levels were anything to go by.

However, by 2001, CCJs had declined to 837,600, a mere 46 per cent of the level a decade or so earlier.

Does this mean that people are now twice as good at handling their finances? Unfortunately not.

Over the last 10 years, there has been a major change in the way that poorly performing debtors are handled, with much more focus put on conciliation and negotiation than on hard-hitting measures such as pursuing debtors through the courts.

The major decline in CCJ numbers last year (17 per cent down on the previous year) was triggered by the Civil Justice Reforms of 1999, put together in Lord Woolf&#39s report, Access to Civil Justice.

These reforms aimed specifically to reduce civil litigation and introduce a “less adversarial and more co-operative climate” into the process.

In particular, the system of pre-action protocols requires creditors to contact debtors in a spirit of promoting settlement rather than resorting to the courts for judgments.

In the mortgage lending industry alone, the fall-off in arrears and possessions reflects this trend towards tolerance and negotiation.

At the last count, there were around 7,000 properties in possession, compared with 40,000 in 1993. Likewise, mortgage arrears are in sharp decline , with around 143,000 accounts in arrears of three months or more, compared with 510,000 in 1993.

Some of this decline in arrears will be attributable to the economic climate of steadily falling interest rates in general, combined with borrowers actually paying more regularly. However, once again,the increased use of negotiation and counselling has undoubtedly contributed substantially to this 72 per cent drop in arrears&#39 levels over the last eight years.

The only “traditional” non-conforming/sub-prime factors which are increasing are bankruptcy and IVAs.

Reversing a steady fall in numbers from 31,000 in 1993 to 19,500 in 1998, the last three years have seen an overall increase of 19.5 per cent to the 2001 level of 23,500 bankruptcies. IVAs have risen sharply from just under 5,000 in 1998 to an average of just over 7,000 a year over the last three years.

There is little or no “official” explanation for this phenomenon which would appear to contradict the falling trends in CCJs and arrears. It is possible that bankruptcy is becoming an increasingly acceptable method of wiping out personal debt, especially as the Government has moved to destigmatise bankruptcy in order to boost entrepreneurship.

A White Paper entitled, Productivity and Enterprise – Insolvency: A Second Chance, was published last summer and consultation closed late in 2001. No doubt, we shall see the”no-blame” bankruptcy on the statute book before too long.

Could the non-conforming/ sub-prime market be starting to disappear altogether?

Not according to the evidence from the grassroots – increasing levels of daily applications and completions – which indicates the contrary.

There is also evidence of a growing burden of consumer debt which, excluding mortgages, now stands at £177bn, up from £115bn in 1999. That is £2,700 worth of personal debt for every man, woman and child in the UK.

As long as this level of personal debt remains, we can be assured of a steady stream of applicants who cannot be accommodated by mainstream lenders and who will continue to provide a market for sub-prime/non-conforming mortgage lending.


Call for action to fill empty houses

The Halifax is urging the Government to end council tax rebates for empty properties.Research by the bank found that 90 per cent of people want the Government to act to reduce the number of empty homes, which stands at around 750,000.Concerns focus more on the social problems relating to empty houses rather than the effect […]

Crash crunch

Do you think that a housing market crash is a significant risk, especially in London, as economist, and former advi-ser to Kenneth Clarke, Roger Bootle warned at the Building Societies Association conference?Stuart Glendinning: It is a pretty strange situation, when you could be £500 better off for simply having walked to your local newsagents and […]

Clerical Medical offers extra on bond

Clerical Medical is offering a 1 per cent extra allocation on its investment bond and “bond fee” version of its distribution bond.The offer which begins on June 5 will apply to all new investments and top ups to existing bonds until further notice.The move increases the allocation on the investment bond to 101 per cent […]

Cemap co-ordinates

As good as it was, the birthday wine that toasted the passing of another year could only be a temporary diversion to the envelope containing the Cemap syllabus that lay unopened in my office.However, as the saying goes, a journey of 1,000 miles starts with a single step and it was time to open my […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers. Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and thought leadership.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm