Recruitment

Competition hots up for business and staff

May 2006

The UK mortgage market is a dynamic place to be with thousands of products available from an ever-increasing number of lenders fighting for business.

Competition is high and so are the stakes. The UK mortgage market was worth over £287 billion in 2005, with the Council of Mortgage Lenders estimating this will be £275 billion for the next two years. With the market forecast to stay static, the need to diversify into other areas is appealing and lenders are continually reviewing their portfolio options.

Margins on prime lending are being squeezed every day, and pressure to increase volumes in an ever more competitive market has led to prime lenders moving into the non-conforming market place.

Sub-prime mortgage lending has evolved over the last 10 years from what was considered dirty lending, into a respectable but profit-making venture. A good example of how this market has evolved is the success of Kensington Mortgage Company which was a pioneer of sub-prime mortgage lending back in 1995. Kensington is now a public company and the current share price and increasing profits are a clear illustration of the success it has enjoyed.

Debt in the UK is at an all time high standing at £1.168 trillion - £975 billion is secured on property and £193 billion is unsecured consumer credit. County court judgements increased by 51 per cent from 2004 to 2005, personal insolvencies grew 45 per cent in the same period. The divorce rate has also increased for the fourth year running. The free availability of credit, and the temptation to spend in our disposable society, is itself fuelling the sub-prime market. It is here to stay, and indeed getting bigger.

Prime lenders have realised that if they want to remain profitable, non-conforming lending is something they need to seriously consider. Recent research by two prime lenders found that the amount of business they were turning down, as it did not fit their criteria model, was some 50% of the prime business being written. That is big profit if you can turn it into good lending.

Securitisation is one method used by many lenders. Buying Residential Mortgage backed Securities (RMBS) is one way to test the water on this kind of lending. These options are simpler than a full launch into the non-conforming market place.

Risk verses reward

Mortgage lending involves managing and minimising risk, verses the rewards to be gained from getting it right so lenders need to look at the risks of non-conforming lending compared to prime.

Some of the risks to be considered include having the right credit management and underwriting experience to work effectively in the non-conforming market. What distribution model will they adopt, and how can they ensure they get the product development right?

Securitisation is big business in the UK. Many lenders are not keeping their lending on their balance sheet but selling or securitising these assets. RMBS sales are on the increase and if lenders deal with all aspects of lending, they can attract a wider range of interested parties to purchase the RMBS, depending on the level of risk the purchaser is looking for. Selling your specialist lending book offers another option to increase profits in a relatively short time period.

Cascade lending (both up and down) is ever increasing. Prime lenders do not want to lose customers to other lender just because they cannot offer non-conforming products. Equally non-conforming lenders are now working in the prime arena for the same reason. As they credit repair their once sub-prime customer, they do not want to lose their business as they re-mortgage to a high street lender for a better rate and deal.

Distribution is a major factor. Branded lenders, packagers, networks and clubs are becoming more powerful, and lenders need to forge ever-closer relationships with these businesses. This is again illustrated in the growth of intermediary only lenders. GMAC RFC is now a top 10-mortgage lender, after only seven years in the UK it has achieved this position, through thoughtful distribution and product development.