By Paul Shearman, Openwork Mortgage Proposition Director
The self-certification market continues to hit the headlines and often for all the wrong reasons. The most recent to catch my were comments from the National Association of Estate Agents (NAEA), suggesting that with rising interest rates, self-cert could be the next mis-selling scandal, as clients encouraged to inflate incomes find themselves unable to meet their commitments, get their homes repossessed and call the regulator.
I hope for the industry’s sake that this prediction fails to materialise and believe the impact of regulation in 2004, combined with moves already made by lenders to tighten-up lending procedures, will have done much to reduce the impact of unscrupulous brokers using self-cert inappropriately. Evidence from lenders so far backs this up, with performance of self-cert business continuing to be positive and indeed often better than prime books of business. That said, there remains a lot that can still be done by all of us involved in the market to help improve the perception of self-cert and by doing so ensure it has a positive future.
Appropriate selling
The top priority has to be to ensure that self-cert is sold appropriately. Self-cert is not simply an opportunity for securing higher borrowing, and should never be promoted as such. It is a lending facility to support clients who are unable to accurately prove their income. Most commonly, this is the self-employed, of which there are an estimated 3.7 million in the UK – some 13 per cent of the workforce; a figure that has grown from three million since 2000.
However, it doesn’t stop with the self-employed, as there has also been growth in recent years in the ‘employed’ workforce where self-cert can be an appropriate lending vehicle. These are scenarios where there is clear evidence of additional, fluctuating and on-going income streams, such as bonuses, which impact directly on the affordability of the loan. There are many lenders, however, who will take clients with high bonus or commission earnings on mainstream deals, so it is up to the broker to understand their client, understand different lender’s criteria and advise appropriately.
Combine the self-employed with the segments of the ‘employed’ workforce where self-cert can be appropriate and the ‘potential’ market for self-cert is as many as 20 per cent of the UK workforce. In other words, one-in-five of the clients walking through the door of most mortgage intermediaries. It is perhaps not surprising therefore that the market is valued at some £22 billion per annum.
There is little doubt that the introduction of affordability models by lenders has impacted on the self-cert market, with many clients seeking high borrowing levels now able to borrow beyond traditional income multiples on mainstream rates. This, combined with broader changes to lending criteria, has led to a recent drop-off in self-cert volumes for many lenders. This is a clear sign of inappropriate usage, but also hopefully points towards the beginnings of a move to more responsible use of the self-cert facility in the future.
Fast-track
Linked to responsible usage of the facility, is the adoption by many brokers of fast-track mortgages as an alternative to self-certification. This must stop if self-cert is to prosper and it is the role of the broker community and the lenders to ensure this happens.
Fast-track has been designed for lenders to quickly process lower risk cases by requesting reduced levels of documentation and supporting income evidence. This is a completely different risk to underwrite than a scenario where income cannot be proven. The main industry sourcing systems also need to play their part in making the filtering process between self-cert and fast-track as clear as possible. I am not convinced this is the case with all systems currently, which again fuels inappropriate use. It is important to remember that with fast-track the lender will always reserve the right to ask for validation of income.
Knowing your client
While the brokers premise should be that they can trust their clients, they must stress to them the importance of being truthful on earnings, especially given the recent rise in interest rates. Brokers must also do a common sense check. Look at the information provided critically and make sure you are comfortable with its accuracy. In other words, ‘Know Your Client’. The freelance hairdresser specifically asking to self-cert and claiming income of £50k per annum should raise alarm bells. If it doesn’t with you, it is likely to when it hits the lender. It is for precisely this reason that a number of our brokers utilise various websites to check average salaries by occupation.
Lenders are becoming more integrated and are increasingly sharing information between themselves and indeed the FSA directly to spot problem brokers. Combine this with better staff training in spotting potential fraud and the likelihood of being caught out using self-cert inappropriately is now higher than ever. It is also worth stressing that most multi-brand lenders increasingly operate a ‘one strike and you are out’ across their entire brand portfolio. Most, if not all, lenders are also randomly sampling self-cert cases, so sooner or later, unscrupulous brokers are likely to get that call.
Opportunities for development
Assuming that the industry overcomes the issues discussed above and continues to drive forward appropriate use of the self-cert facility, what opportunities exist for the development of the sector?
While there was a bit of a lull in innovation around self-cert up to and immediately following regulation, this is starting to change and the influx of new lenders is likely to give increased impetus to this process. The biggest opportunity I see is for the increasing introduction of flexible product features, such as the facility for under and over-payments, taking payment holidays and utilising the offsetting capabilities widely available on mainstream loans. People for whom self-cert is most appropriate are those that cannot prove a stable income and it is these people who could arguably benefit most from the flexible payment facilities that the rest of the market is afforded.
Just think about the volatility of life as an IT contractor or film producer, earning high incomes often for short periods, during which they can overpay, followed by time seeking the next project during which they can underpay or take-out funds to pay for a well-earned holiday. The offsetting facility would be particularly useful for those people who save towards their tax bill though out the year or if business accounts could be used to offset a self-cert mortgage.
The other big opportunity for me is simply the increasing affordability of the self-cert facility. The days of premium charging for self-cert are long gone and the differential now between mainstream and self-cert is pretty narrow. This must make borrowing more attractive to prospective clients and thus drive market growth. The increase in price competitiveness will also be driven by the multitude of new lenders entering the market. The concern must be, however, that as the market gets ever more competitive, responsible lending principles will be challenged as new and existing players fight it out for market share.
There is little doubt that as our employment patterns change and people seek out an enhanced work and life balance, flexible working patterns will become ever more prevalent, and thus the demand for self-certification mortgage products may rise considerably.
The challenge for the industry is to stay on the right side of regulation. Lenders need to continue to adopt responsible and consistent approaches to product and process design and brokers need to select clients carefully and sell appropriately. Achieve this, and we’ll avoid the doom mongers’ predictions and following a likely lull as the impact of affordability and criteria changes are felt, see a resumption in the growth of self-cert over the coming years.
