The reputation of self-cert lending has suffered its fair share of knocks in recent years. The start of these can largely be traced back to an episode of BBC2’s The Money Programme, shown in October 2003. Entitled ‘Mortgage Madness’, the undercover investigation showed employees from some of the country’s best-known estate agents and brokers encouraging borrowers – including first-time buyers – to exaggerate or, in some cases, even lie about their salary on a mortgage application so they could secure a mortgage.
More recent press on the record number of personal insolvencies – more than 107,000 during 2006, according to the government’s Insolvency Service – threw self-cert back into bad favour as it was perceived as a passport to over-borrowing on mortgages. The irony of all this is that self-cert as a lending sector is now more scrutinised – and therefore safer – than ever.
For example, in February 2004, just four months after The Money Programme was aired, the Financial Services Authority (FSA) responded with a report into self-cert lending. Even in what was then a pre-regulatory market, the FSA found that controls among lenders were generally in place to mitigate the risk self-cert could be perceived to involve. It also issued a no-nonsense warning to consumers that knowingly falsifying your income was a criminal offence.
In November 2004, all mortgages came under regulation, which placed accountability for decisions on self-cert firmly at the doorsteps of brokers and lenders alike.
TFSA review
The FSA is now midway through a ‘second round’ investigation into this improved self-cert market, which is due for publication in the next few months. Its purpose is to check that the systems and controls put in place at regulation are still working. For example, it will check suitability and affordability of the products and that self-cert is not being used as a vehicle for fraudulent transactions.
No more risky
Self-cert deals should logically then, pose no more risk than mainstream lending. Theoretically, a borrower who has income from a number of different sources, such as a trust fund, overseas property and their own business, should be a less risky proposition than a first-time buyer on a starting salary. Perhaps the bigger and more real threat to self-cert in 2007 is lenders’ increased use of fast-tracking or reference-free underwriting, automated lending and automated valuation models (AVMs). Where as five years ago, a self-cert loan could have been the only option, now a borrower could qualify for a fast-track loan instead. However, there are more than a few problems with this approach. Fundamentally, fast-track loans come under mainstream lending but high street lenders rarely advertise this fact and are therefore inconsistent in their fast-track criteria.
Being mainstream lending, fast-track mortgages also require borrowers to have an impeccable credit rating, a significant deposit – or both. Lenders also reserve the right to ask the borrower for proof of income at any stage, where true self-cert guarantees this won’t be the case. In addition, fast-track will often not consider self-employed borrowers who have been trading for less than two years – and can fail to take into account income that is non-guaranteed. Of course, all of these factors fly in the face of the very motivations for an applicant to opt for self-cert in the first place. In fact, the advent of fast-track has thrown some level of confusion on the real purpose and definition of self-cert – something that the Council of Mortgage Lenders (CML) found in its most recent survey of 30 ‘self-cert’ lenders.
Silver lining
One silver lining for borrowers is that fast-track has cranked up the competition among self-cert lenders with loan-to-values going up and interest rates, relative to a rising Base Rate, largely going down.
But wherever your seat is positioned within the specialist lending arena, it is clear to see that the growing need for self-cert mortgages among borrowers has kept the sector well above water. In fact, self-cert in 2007 is thriving. Hundreds of thousands of people who have specific borrowing needs use self-cert effectively and the market is growing all the time. It is not the intention of the FSA to stifle this thriving sector; only to check that it is being used correctly. Many self-cert borrowers are part of the growing army of self-employed. Figures from the Office for National Statistics (ONS) show year-on-year growth in self-employment since 2001, with numbers climbing 8.9 per cent – that’s 282,000 people – in the year to September 2003 alone. With flexibility more in demand than ever in the context of our working lives, this pattern is continuing.
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Despite the growing competition from other lending areas, there is no shortage of self-cert providers taking their share either. According to Moneyfacts, 31 prime lenders and 27 non-prime lenders currently operate in the self-cert market offering a total of 3,081 fixed rate and 1,294 discounted deals. Add to this the fact that there is little difference in repossession figures between mainstream and self-cert lending – according to anecdotal evidence from the CML – and one is forgiven for wondering what all the fuss was about in the first place.
