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The quiet revolution

Access to mortgages has undergone a quiet revolution recently. It may not have grabbed the popular headlines like endowments and has barely been noticed by those who report on mortgages (outside the specialist media) and mortgage customers but it is no less significant for that.

The centre ground of mortgage lending has been squeezed. This is a situation borne of favourable economic circumstances and exacerbated by the entry of some high-profile, big-name, centralised lenders into a mature mortgage market.

One result is that many high-street mortgage lenders are ever more open to recognising the case for granting mortgages to customers who previously would not have conformed to their lend-ing criteria.

Nowhere are the effects of this being felt more than in the sub-prime lending market, which is arguably becoming more mainstream month by month.

Talk of the ground narrowing between sub-prime and high-street lenders has been around for a while. Stiff competition on all fronts, combined with an economic pic- ture of high employment, low inflation, stable interest rates, high consumer spending confidence and the virtual eradication of negative equity, has made lending to indiv-iduals who do not conform to the clean-status norm, well, the norm.

This has been reflected in many high-street lenders recently relaxing their lending criteria and amending their credit scoring.

At the same time, companies that had successfully been developing business in the non-conforming market, have secured reputations commensurate with their growing status, shaking off the negative image which stigmatised the industry&#39s early days.

For evidence of this, look no further than the make-up of the Council of Mortgage Lenders, on which the major sub-prime names play a full part.

This convergence of what were, effectively, separate mortgage markets until recently is being continually consolidated by the growing number of lenders willing to meet the needs of the applicant who was previously persona non grata when it came to being granted a mortgage.

It is reasonable to assume that a time will come (some three to five years hence) when all lenders will effectively be all-status lenders, handling every kind of mortgage business.

The days are almost over when an inflexible credit-score process results in the rejection of an applicant on a simplistic analysis of personal circumstances which concludes they are a poor credit risk because they are self-employed or had a County Court judgment against their name. Increasingly, anyone who can make a reasonable case for being granted a mortgage will receive one.

However, while the gulf between who will lend to whom may close – and the lending market will provide a better and more inclusive service as a result – even more important differences between lenders will come into play. To mis-quote singer Peter Gabriel: “Looks may be deceptive but distinctions will be clear.”

This is because the fulfilment of the potential of sub-prime lending will be driven by the biggest names in the mortgage market. Credit- impaired customers will no longer expect to pay through the nose for a mortgage deal. They will be customers, like any others, and, while those with poor credit ratings will always have to pay a premium, there will be no place for the rip-off.

All customers will demand a good deal. No one will accept a mortgage at any cost. As a result, the buying power of the biggest names will come into its own. The players that can source money the cheapest and pass on the benefits will shape the market.

This funding question is central because the associated costs of funding sub-prime business is less to the high street than to the independent sub-prime specialists, which traditionally purchase their funds through warehouse lines and which may then have to recoup the significant costs of securitisation through their mortgage revenues.

A conservative estimate would put the average cost of money to the high street lenders at some 1 per cent to 1.5 per cent less than it is to the independent sub-prime market.

Ironically, sub-prime lending will remain a specialist business. The fact is that most prime lenders are not staffed to handle it, not least at the underwriting level, but probably at the marketing and customer service level, too.

As has already happened, high street names will recognise this and not use their parent brands in the sub-prime market. Instead they will use subsidiaries, developing existing ones or buying up independent specialists with reputations and track records.

The fact that no one has yet developed a points score system which can genuinely and consistently accommodate the vagaries of non-conforming clients both proves and compounds the need for the specialist approach.

Surely it is only a matter of time before such a system is created, speeding up processing and reducing costs still further. Bigger lenders are, once again, more likely to be able to pass on these savings.

A key question that a sub-prime points score process would have to address is whether a particular customer should be labelled as sub-prime. Even limited adverse credit can, under current arrangements, lead to a tendency for business to follow procuration fees rather than look carefully at the client&#39s position.

The higher profile of sub-prime lenders in the market will lead to fairer, more consistent benchmarking of adverse credit customers and, almost inevitably, to those with a less impaired credit rating getting a better deal, reflecting the lower risk.

Sub-prime lending has come of age. Now it must mature.

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