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The non-conforming market has undergone massive growth and transformation over the past 10 years. Once viewed as a somewhat ‘shady’ market, this sector has developed considerably over the past decade.
Catalysts for growth
The main catalyst of the rapid growth of the non-conforming market has been the ‘spend now, save later’ attitude of UK consumers. Many citizens have some form of debt, with Citizen’s Advice statistics revealing the average person in the UK has debts totalling over £6,000. With rising student debts and general living costs, in addition to rising utility bills and council tax, this figure is likely to increase further.
Indeed, statistics released by the Council of Mortgage Lenders (CML) concerning mortgage arrears from July to September 2006 revealed that they reached 111,900. However, in context, this was equivalent to less than 1 per cent of all mortgages. The trade body also stated that 8,140 properties were repossessed during the first six months of 2006 – an increase from the 5,690 seen in the second half of 2005. However, these 8,140 properties taken into possession worked out to an annual rate of 0.14 per cent of all mortgage loans.
With the CML statistics indicating a rise in possessions and arrears, and Citizen’s Advice and other organisations issuing concerns over rising debt levels, Hugh Nichols, partner at Badbury Berkeley Financial Services, admits the market has changed considerably. “It is a lot easier to get credit nowadays, therefore we see more debt problems than we did 35 years ago. More lenders will take applications from people with adverse credit. They have been forced on them by the competition and the fact they are continually striving for more profit.”
As Andrew Forsey, director of Andrew Forsey Financial Services explains, the non-conforming market has been driven by the growth in the number of people with adverse credit or missed payments. He says: “One-in-four people have previously had adverse credit or arrears on their mortgage, which has allowed the non-conforming market to grow as it accommodates more people. If you have missed a mortgage payment, have a CCJ or a default, you come under the non-conforming category. Before there was a clear criterion for the non-conforming market, now it is the next stage from prime.”
Providing a solution
With the enhancements and developments of non-conforming – ‘the next stage from prime’, right through to the other end of the scale, heavy adverse – the sector now provides a solution for most borrower needs, and represents a fantastic and growing opportunity for brokers and lenders. As a result of increased borrower activity in the market over the past five to 10 years, more and more lenders and brokers are stepping into the now bustling non-conforming market.
Many prime lenders have made inroads into the non-conforming marketplace, recognising the valuable opportunities the market provides.
David Hollingworth, head of communications at London & Country, admits the non-conforming market has grown and evolved beyond all recognition over the past few years. He says: “In terms of evolution in the non-conforming market, it is primarily being driven by the number of new entrants, including the smaller mutual societies. We’ve seen an explosion in mainstream market lenders as well as new lenders who are often being backed by big American banks. What this means in terms of the market is fiercer competition, which will benefit the consumer. The interest rate differences between the non-conforming and conforming markets are becoming increasingly narrow.”
With a greater synergy between prime and non-prime, with similar rates and fees, Hollingworth states that he expects the market to expand over the coming years. However, he adds that much of this market could potentially be dominated by a few key lenders. “Who knows what will happen to the market in terms of size,” he says. “If it doesn’t grow, we will have to watch the existing players try to get as big a slice of the action as they can. However, the general expectation is that the market should grow. High levels of consumer debt and the unfortunate fact that people may run into further difficulties down the line mean that the market should have the opportunity to grow.”
Andy Pratt, chief operations officer at Alexander Hall, suggests more lenders would consider entering the non-conforming sector within the next few years, with the involvement of large investment organisations and overseas companies looking to the UK non-conforming marketplace as a way of penetrating the market. He says: “The market is definitely growing. There are more people with credit problems so there is an increasing customer base. I think there will be new entrants into the market next year, backed by large investment banks.
“The future of how the market grows is open for debate and will depend on whether some of the high-street lenders adjust their underwriting criterion to incorporate more customers with adverse credit. At the moment, a lot of lenders are looking at non-conforming customers on a case-by-case basis. 10 to 15 per cent more of our clients have had credit problems this year.”
Nichols agrees lenders who do not currently have non-conforming product ranges will re-evaluate their position over the coming months. He says: “More lenders will come into the market. There are a few large lenders who still are not offering non-conforming products, but within the next two to three years they will either enter it using their own name or by purchasing an existing non-conforming lender. There is no way they will let the non-conforming business walk away. I welcome more lenders coming to the market, as it should encourage more competition.”
Contributing to the
problem?
Some commentators have argued that increased activity in the non-conforming market is contributing towards a rise in arrears and possessions and that this could become a greater problem in the future, as more lenders focus on this sector of the market.
Although there is little doubt that concerns rage over rising consumer debt, arrears and possessions, the non-conforming market is attempting to quell and indeed help ease these fears. Responding to the social dynamics, the need for a large non-conforming marketplace has never been greater.
Statistics concerning arrears make stark reading, but in perspective it seems the problem is a relatively small one. Although 35,320 mortgages were in arrears in June, it has to be remembered that this is out of more than 11.5 million outstanding mortgage loans in the UK. At West Bromwich Building Society, for example, only 1.18 per cent of all borrowers who completed a mortgage in the past year missed one payment. 2.94 per cent of those that missed a mortgage payment were first-time buyers.
Technology
Another reason for the continued evolution of the non-conforming marketplace has been the rise in technology. Although automated valuation models (AVMS) are, at the moment restricted to low loan-to-value (LTV) prime mortgage deals, it is hoped this technology will soon be transferred to the non-conforming market.
Forsey believes the advent of new online innovations will help further boost the growing market, and may further diminish the prime sector. He explains: “We have seen more innovations and online applications; now people with adverse credit can get a decision within a couple of minutes.
“The market is getting bigger because it is more competitive and is overlapping into the prime market. If anything, the prime market will get smaller.”
Conclusion
It is clear that the non-conforming market has evolved considerably since its introduction. Advances in product design, the legitimacy of companies involved in the sector and technology, mirrored by increasing borrower demand has meant that the sector has grown beyond all recognition. Although there are worries as to the size of the non-conforming marketplace, as long as there is a need for such a product, the sector will thrive. With all indications pointing to a further period of debt it seems this market is here to stay.
The addition of new lenders into the fray and foreign investors looking at the market means should indicate that the non-conforming sector is strong and will remain so in the future.
