We need a stress-tested market, warns Bob Young, managing director of Capital Home Loans
Concentrating on the day job may well have been particularly difficult over the past week given the incredible events that have been played out across the country. However, the mortgage market and financial services industry continues to operate and while the past week may have seemed a good one to ‘bury bad news’ it is important to highlight some areas which may be concerning for the market – and I do not just mean the financial crisis which continues to ensure volatility for all.
All in all I get the sense across a number of product areas that we are starting to see ‘criteria creep’ which could be deemed a good thing if it allows more individuals to secure finance to buy their properties however we must also guard against it going too far.
I was reminded of this when I saw a story regarding one lender, Northern Bank in Northern Ireland, purporting to offer 100% LTV mortgages to first-time buyers. The Bank confirmed it offered 100% mortgages and I immediately had a slight sense of dread that we were slowly returning to those days when such products were all too readily available.
In a nutshell I fail to see how 100% mortgages can be good for the potential borrower in what is at best an unstable house price environment. For a start, we are constantly talking about the need for strong deposit levels in order to make the customer ‘buy in’ to their mortgage that much more. This is one of the key pillars of good lending – we could refer to it as the borrower having ‘skin’ in the game.
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It’s obviously a truism that someone who has 10/15/20% of equity within their property is going to work that much harder in order to keep up their repayments and to keep their property. Customers who have put nothing in upfront may feel they have little to lose and the monthly mortgage payment essentially takes the shape of a rental payment. Moving into arrears and ultimately possession may not seem such a disaster if there is no deposit/equity to worry about losing. In many ways it has been a very low-risk option.
Therefore, what are we to make of the return of 100% albeit in a very small way? Well, to my mind, this may be just the thin end of the wedge particularly if we view an enlarged marketplace in which new lenders eventually come to market. In order to compete and gain market share quickly, as most will want to do, ‘criteria creep’ could be deemed a necessary evil. Therefore, it may be decided that a quick dash up the risk curve, a move away from the recent responsible lending practices of the immediate past, could bring quick wind in terms of column inches and getting on the agenda of those that matter – namely intermediaries, advisers, brokers and their clients.
This, to my mind, is worrying. It is not just the residential market where we could be seeing a slight move away from the criteria norms of the past 18 months. Given the ongoing and misplaced talk of a ‘buy-to-let boom’ it appears that some lenders are willing to loosen criteria in order to compete and generate business.
A number of lenders are said to be ditching the income requirements they place on potential buy-to-let borrowers and just relying on rental cover in order to make a lending decision. While I agree that buy-to-let should not be viewed as a ‘normal residential mortgage’, the income requirement criteria provides further reassurance and confidence to the lender. A decision on whether a loan should be offered must be based on a balance assessment of, what I call, the four ‘C’s’ – cash, collateral, character and capacity. Essentially, does the borrower have the necessary deposit/equity, what about the property itself and its ability to secure the necessary rental required, plus what about the individual borrower and their finances. Underwriting which covers all these aspects would seem to be much more a case of responsible lending, than underwriting which missed out any of these key areas.
Therefore, lenders may well need to look again at how they choose to operate particularly in terms of what criteria they tweak or amend in order to compete in a market which (thankfully) is growing and attracting new lenders. We must welcome the fact that the market is perceived as being a place where lenders want to conduct business but we must ensure a system of sufficiently strong stress-testing is also in place to stop market difficulties from appearing. I had hoped we had all learnt the lessons of the past however there could be some in the industry who either joined the sector post-Credit Crunch or have very short memories.
