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Sub-prime numbers

With the property market slowing down, does the sub-prime sector offer an opportunity or a threat to brokers looking to diversify their business?

Some sub-prime lenders are arguing that as the housing market slows, brokers can look to specialist lending opportunities to see their businesses through quiet times.

Some lenders say specialist mortgages are an area where brokers can demonstrate their worth and secure mortgages for customers who would normally struggle.

Before the end of last year a swathe of figures demonstrated a decline in the property market, with the Council of Mortgage Lenders, British Bankers Association and Building Societies Association all providing figures showing mortgage lending was slowing.

CML figures showed that gross lending was down by 4 per cent in November 2004 as the number of people buying homes fell and loans for new property purchases sagged by 25 per cent year on year to 85,000 – the lowest total since February 2003.

London & Country mortgage specialist James Cotton says: “With sub-prime cases, there is the promise of bigger procuration fees and increased remuneration, which will attract the attention of brokers hoping to increase ratio of pounds per case. The level of effort required may well be greater but I would expect the increasing numbers of lenders looking to attract sub-prime business should provide brokers with more choice and could ease the process of placing such cases.”

But some brokers are not so positive about the potential for specialist lending. Charcol senior technical adviser Ray Boulger says:”I think that any suggestion that revenue from sub-prime mortgages will boost mortgage advisers’ income while prime business struggles is fatally flawed.” He believes the business models of many specialist sub-prime brokers will not survive once the FSA starts implementing its treating customers fairly policy.

He says: “The regulator may not be too impressed with any brokerage which primarily places business with lenders who pay at least a 2 per cent procuration and/or packaging fees or goes for products with nasty extended early repayment charges as well as client fees up to 10 per cent. The FSA is also likely to be looking at brokers who sell sub-prime mortgages alongside a lot of single-premium accident, sickness and unemployment insurance, especially if it is sold on the basis of misleading the client by implying that taking the singlepremium ASU will facilitate the mortgage application being accepted.”

Boulger also warns that the FSA may look closely at any firm which places a significant proportion of their business in the non-conforming market if other brokers seem to be able to place similar cases with mainstream lenders.

Far from expecting sub-prime business levels to be boosted, Boulger expects that when regulation beds down fully, more brokers will be particularly careful about placing business in the sub-prime market.

Mortgageforce chief executive Rob Clifford believes the extra work involved in dealing with non-prime cases could also curb the business levels that some firms do with specialist lenders. He says “There is no doubt that advisers will gravitate towards specialist areas of the sector to sustain sales volumes if they see prime cases becoming more scarce but it needs to be borne in mind that sub-prime cases can often be far more labour-intensive than, say, a straightforward prime remortgage. These cases might well involve an adviser in many hours additional work placing the case and associated paperwork, so above-average procuration fees do not always mean extraordinary profit.”

Where should brokers look for alternative revenues? Clifford feels that secured loans are a significantly untapped source of commission income for brokers and also says brokers should work hard at increasing their cross-sales of protection products such as mortgage term assurance, critical-illness cover and PHI or MPPI contracts.

He says: “These can deliver as much and more commission than the lender’s procuration fee, yet many brokers simply fail to achieve sensible sales levels, typically through apathy rather than lack of ability. Conveyancing referrals can also generate income for brokers, as solicitors are increasingly offering fees for such introductions – our own scheme pays brokers at least 50 per case.”

Cotton remains confident that remortgaging is likely to hold up and believes that mortgages will always open up other avenues to review a client’s needs, including life and critical-illness cover, ASU and buildings and contents insurance and that reviewing these current arrangements in addition to the mortgage will often result in further savings for the client.

Boulger believes that as the housing market falters, a better approach to boosting income might be to look for niche areas and innovative products. He feels that quiet times in the housing market can provide the perfect opportunity to improve the quality of service and improve efficiency to boost completion rates, raise recommendations from existing clients, and cut costs.

Cotton says: “With more time available to focus on these areas, advisers will be able to serve their clients better and increase the earning potential for themselves. This will help compensate for the reduction in the overall volume of mortgage business.”

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