Adverse Credit – The Market in Focus by mortgageintroducer

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ADVERSE CREDIT www.mortgageintroducer.com

THE MARKET IN FOCUS

July 2021

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07/07/2021 10:11:27

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EDITORIAL

COMMENT

Publishing Director Robyn Hall Robyn@mortgageintroducer.com Publishing Editor Ryan Fowler Ryan@mortgageintroducer.com Editor Jessica Bird Jessicab@sfintroducer.com Deputy News Editor Jake Carter Jake@mortgageintroducer.com Editorial Director Nia Williams Nia@mortgageintroducer.com Commercial Director Matt Bond Matt@mortgageintroducer.com Advertising Sales Executive Tolu Akinnugba Tolu@mortgageintroducer.com Advertising Sales Executive Jordan Ashford Jordan@mortgageintroducer.com Production Editor Felix Blakeston Felix@mortgageintroducer.com Head of Marketing Robyn Ashman RobynA@mortgageintroducer.com

MORTGAGE

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The need for brokers

t’s no surprise that there has been a rise in demand from borrowers with adverse, or complex, credit needs. Indeed, the COVID-19 crisis has exacerbated existing issues for many who faced credit problems. However, this area of the market, whilst often overlooked, is increasingly well served by brokers and lenders who have the expertise to help those who need it. It’s often forgotten that those with credit issues have found themselves in such a position out of misfortune, not malice. It is reassuring to hear that those customers with adverse credit are more positive about their prospects for a successful mortgage application than they were six months ago. But according to research by Pepper Money, 52% of adults with adverse credit who were looking to purchase a property in the next 12 months are concerned about having their mortgage application declined due to their credit history. Misconceptions about the impact of adverse credit on the ability to successfully apply for a mortgage are demonstrated by incorrect assumptions to the impact a County Court Judgement (CCJ) can have on their mortgage prospects. While 75% of people with adverse credit said they knew what a CCJ was, 23% of people surveyed thought they would have to wait longer than five years to apply for a mortgage after being registered with a CCJ. Pepper said this was in contrast to the reality that lenders were able to offer competitive mortgages to customers who had been registered with a CCJ as little as six months ago. It’s clear that brokers have a key role in educating 1 and 07/07/2021 10:52:38 helping those with credit issues.

Contents 4 Cover: Inclusion is not an illusion Natalie Thomas looks at the state of the adverse market and brokers’ role in financial inclusivity 10 Spotlight: Making a difference Mortgage Introducer asks Paul Adams at Pepper Money about the Adverse Credit Study and the learnings for brokers and lenders 15 Steve Seal Delivering better customer outcomes 17 Claire Askham Adverse credit in 2021 and beyond 19 Sundeep Patel A fresh start for those with adverse credit 20 Adverse opportunities Jake Carter outlines Mortgage Introducer’s round-table discussion, which asked about opportunities in this market, common reasons for poor credit, and the role of technology 26 Terry Pritchard What did we really learn in 2008?

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JULY 2021 ADVERSE CREDIT

FEATURE

COVER

Inclusion is not an illusion Natalie Thomas looks at the state of the adverse market and considers the role brokers can play in financial inclusivity

n a society where some form of credit is available almost instantly and to practically anybody, it stands to reason that there are going to be some borrowers who default. Throw economic uncertainty and COVID-19 into the mix and that risk is heightened further. Far from making them unworthy mortgage candidates, however, many of these clients’ financial woes may be temporary, or the result of a one-off life event, and they simply need to be steered in the right direction when it comes to obtaining a mortgage. The jury still appears to be out when it comes to assessing the impact COVID-19 has had on borrowers’ credit files. While some brokers and lenders are reporting a marked rise in enquiries from those with some adverse history, this sentiment is not echoed across the industry. This could be down to several reasons, such as the government measures in place, borrowers covering their bills by edging further into debt, or some form of other temporary fix. While there may still be a nervousness from brokers – and some lenders – when it comes to the adverse market, most lenders are increasingly in tune with how they can best help such borrowers. As the full fallout from the pandemic continues to unravel, a growing focus on the adverse market could be on the horizon. ADVERSE ON THE RISE? Brokers are often the eyes and ears of the mortgage market. As such, they are the first to spot any trends which might be occurring. Matthew Corker, operations director at Knowledge Bank, says: “The data from our criteria tracker shows there has been a significant increase in brokers searching for criteria related to adverse credit since the pandemic hit. Before March 2020, there was a monthly average

ADVERSE CREDIT

JULY 2021

of around 6,000 searches using terms connected to poor credit, and since the pandemic this has spiked to 8,500. These include County Court Judgments [CCJs], defaults, bankruptcy, missed payments and unsecured loans, amongst others.” Corker believes the increase is too significant to be a coincidence. “Looking at the unemployment figures and numbers of people on furlough, it is perhaps no surprise that brokers are also encountering more clients struggling financially,” he says.

“While there can still be a nervousness from brokers – and some lenders – when it comes to the adverse market, most lenders are increasingly in tune with how they can best help such borrowers” Joseph Aston, national sales manager at Vantage, is also unsurprised by the rise in enquiries. “In modern times, consumers can take credit on a plethora of items, from cars to furniture even to clothing,” he says. “This naturally creates more opportunity for people to fall behind on payments and accrue some minor adverse credit – which can be a dangerous thing if not monitored carefully. “COVID-19 has certainly compounded this risk and created more adverse in the market, which has naturally hindered a number of borrowers.” A TALE OF TWO MARKETS While there are those who are in financial difficulty, Corker believes a ‘two-speed’ economy is forming. → www.mortgageintroducer.com

FEATURE

COVER

FEATURE

COVER “Those in stable employment have increased savings at record levels, with hospitality and foreign travel offlimits, they have amassed an estimated £200bn since the pandemic began, according to Bank of England figures,” he explains. “However, those who work in industries hit by the pandemic have undoubtably struggled. “As we have seen from our own data, the increase in brokers searching for clients with adverse credit suggests there is definitely a divide.” So, although the trend of rising adverse is evident, it is not yet being felt in all corners of the mortgage market, and the anticipated financial damage does not yet seem to have escalated to the heights many first predicted. Could it be that the financial damage from COVID-19 will not manifest into a new generation of adverse borrowers? Or is it that the government’s support schemes are artificially propping up the market, with the full effects to be felt further down the line? Paul Adams, sales director at Pepper Money, says: “The latest Pepper Money Adverse Credit Study, which was conducted in March, actually found that the number of people with a record of adverse credit has fallen over the duration of the pandemic. “However, there have been a number of schemes in place to help people financially over the course of the last year. As these are removed, we expect the number of people missing payments to start to increase again.”

He continues: “Our research also found that COVID-19 has had a more negative impact on the finances of those people who already had a record of adverse credit than those who have not. “A larger proportion of those with adverse credit than without said that their income has reduced as a result of the pandemic and that their borrowing has increased. So, there will be many customers who need the help of a broker to help them identify the right mortgage for their circumstances.” According to the Insolvency Service, there were 718 individual bankruptcies and 1,525 Debt Relief Orders (DROs) registered in May 2021. The number of bankruptcies was similar to May 2020, and 50% lower than May 2019, while DRO numbers were similar to that of May 2020, but 33% lower than in May 2019 . In its accompanying commentary to the statistics, the Insolvency Service reveals that since the start of the first UK lockdown, overall numbers of company and individual insolvencies have remained low when compared with pre-pandemic levels. This, it argues, is likely to be partly driven by government measures put in place to support businesses and individuals. Pete Mugleston, managing director at the Online Mortgage Advisor, has also spotted the surprising trend of reduced adverse credit among clients. “Our latest figures suggest that there has actually been a reduction in the number of mortgage customers with credit issues, but this could be down to a number of factors,” he explains. “Firstly, it’s possible that people with bad credit have been put off applying for a mortgage in the current climate, based on the assumption that it’s a bad time to buy. “This isn’t necessarily true, as many mortgage lenders operated ‘business as usual’ throughout the pandemic and have gradually introduced a range of options for customers with less-than-ideal credit reports since then.” Mugleston’s experience is that lenders are increasingly willing to try and help such clients – depending on the age, severity and reason for the credit issues in question. “As a society, perhaps more than ever before, in a communal way people battened down the hatches, reduced spending and saved more than ever, which along with furlough – instead of redundancy – of course has saved many from financial ruin. “I think when furlough fully ends, we’ll see that many have moved sectors into new careers, and others might well lose their jobs. Typically, high employment means low credit issues.” SECOND CHARGE While one might associate a missed credit card payment or similar as the first sign of a borrower’s financial struggle, an early indication could also be an increase in the amount of credit borrowers are taking on.

ADVERSE CREDIT JULY 2021

www.mortgageintroducer.com

FEATURE

COVER Barney Drake, chief executive officer at Specialist Mortgage Group, says that while it is not seeing a marked increase in borrowers with adverse credit in the second charge market, the business is seeing a rise in the number of people who have increased their borrowing and require debt consolidation to stop them getting into further financial difficulty. “Such customers are increasingly unable to remortgage, so by consolidating via a second-charge mortgage it obviously frees them of this obstacle and potentially enables them to then remortgage as planned at a later date,” he says. “This is a particularly complex area of advice, as we have to calculate the cost of consolidating each line of credit, while considering the chances of remortgaging when the customer intends, and roughly onto what rate. Only at this point are we able to calculate the total cost of consolidation and establish whether advice is suitable to consolidate or not.” Steve Brilus, chief executive of Evolution Money, is equally not seeing an increase in adverse enquiries within the second charge sector. “Surprisingly we haven’t seen a significant rise in clients with adverse credit as a direct result of COVID-19,” he says. “This might well change as we progress throughout the year, and specifically as furlough comes to an end, but at present it’s not a trend that’s visible.” ADVERSE AVAILABILITY So, how can brokers prepare for a potential rise in adverse enquiries? For mortgage brokers unfamiliar with the adverse market, the prospect of helping such a client can at first seem hard to navigate. The adverse market, however, is currently a healthy one, and options are plentiful for those with some form of blip. John Phillips, group operations director of Just Mortgages, says: “There are now plenty of lenders who will deal with borrowers who either have or have had adverse credit. “Lenders are becoming a lot more flexible, both to cope with the changing needs of borrowers and to compete for market share and the higher revenues that come with more complex cases like adverse credit.” David Hollingworth, associate director of communications at London & Country, is another who believes high street lenders might look to the light adverse market when it comes to gaining market share. “While for the heavier adverse you will always be looking to the specialist lenders, mainstream lenders could look to lend in the near-prime market, even if just around the edges,” he says. “If it’s minor and historical adverse then a client probably stands a good chance of a high street lender considering it, subject to credit score.” One way in which the specialists can differ, Hollingworth adds, is that their product criteria can often be black and white, making it easier for a broker www.mortgageintroducer.com

to know if a case will be considered, whereas a high street lender might still consider a case but need to discuss it first. Another area that can separate lenders is price, says Aston: “There are still lending options for most consumers, with lending appetites sometimes restricted on LTV and at an understandably higher price. “The more severe the credit issues, the more limited the lending pool, but there is a wide market willing to take a view on some minor indiscretions.” →

Well-prepared brokers will help complex clients Dale Jannels managing director, Impact Specialist Finance

e are undoubtedly seeing more cases with varying degrees of adverse credit since the start of the pandemic, with a larger proportion of customers than before having experienced some form of blip in the last 18 months. The next generation of adverse credit is coming through, and if you so much as ‘cough’ on your phone bill, you could be slapped with a default almost immediately. One of the biggest increases we are seeing at the moment is in car parking fines. People don’t want to pay a silly little charge because they went into a pet store, but then they’ve got private firms chasing them down. Unfortunately, things could escalate quickly, and before they know it those parking charges are up to £700. We are starting to see lenders create limited distribution product ranges that cater for borrowers with adverse credit, especially those with slightly heavier adverse or more complicated circumstances. These lenders have also recognised the value of providing these to certain packagers, as we have the experience and expertise to help brokers with their adverse credit clients. The biggest surprise to us is that many people bury their heads in the sand and do not think they can find a mortgage – they instead end up either dropping onto their lender’s standard variable rate or just not purchasing a property in the first place. Educating, extracting the right information and managing clients’ expectations have always been key components within any advice process, but there is an even greater emphasis on these factors. When it comes to brokers helping clients who have some form of adverse, the more thorough and better prepared brokers are from the outset – in terms of asking the right questions to generate relevant and detailed responses from any complex or adverse customer – the less time is spent firefighting issues further down the line, and less stress will be placed on the client, throughout this process. Many online tools are readily available to brokers and customers to check their credit profiles, and these should be utilised early with the customer to ensure you know the full picture before you engage with any lenders or packager partners.

JULY 2021 ADVERSE CREDIT

FEATURE

COVER

Adviser know-how and common sense decisions Chris Blewitt head of intermediary distribution, Darlington Intermediaries

s we begin the final journey out of lockdown from the COVID-19 pandemic, there are undoubtedly going to be those who have got through the past 16 months, but have had some financial bumps along the way. While government support schemes have been fantastic for those who have needed them, this does not mean that compromises have not had to be made along the way in households up and down the country. These are not people who are making negative choices, but who are having to prioritise their finances owing to something which is out of their control. For those applicants who have adverse credit on the file, no matter the reason, the choice of mortgage lender is dramatically reduced. With many lenders solely relying on a credit scoring system, this is an unfortunate inevitability across many of the industry’s biggest lenders. There are, however, a strong cohort of lenders, many within the building society sector, who rely on the skills and knowledge of their underwriters to make a lending decision, as opposed to an arbitrary credit scoring system that moves in line with the lender’s desire for business volumes, not the needs of the demographics they are helping into their homes. In my opinion, the ability of an underwriter to individually assess each case and understand the applicant’s situation, both in terms of what has happened but crucially how it happened, is the most important element in supporting applicants who have less than perfect credit files. Where I am seeing best practice, and therefore an increased chance of a successful mortgage application, is where credit files have been obtained up front by the broker, and any blemishes declared in the first instance. As we emerge from the pandemic, there will be those who look to either get on the property ladder or move home, some of whom are going to need extra support in making this dream a reality. The value of a mortgage broker cannot be understated, and the role of a lender which can make common sense decisions using experienced underwriters, not credit scores, will be more important than ever. Mugleston also believes that lenders are eager to lend to this demographic. “Brokers who are attempting to place these clients are finding increasingly willing lenders, depending on the age, severity and reason for the credit issues in question,” he says. WHAT BROKERS SHOULD BE DOING When it comes to helping a borrower with adverse credit on their file, Phillips says the first consideration should always be centred around whether finding a mortgage is actually the right thing to do. “It may well be that, as a broker, you can place the mortgage, but it’s more important to ask whether this is the right thing to do for the client,” he explains.

ADVERSE CREDIT JULY 2021

“One way in which specialists can differ is that their product criteria can often be black and white, making it easier for a broker to know if a case will be considered. A high street lender might consider a case but need to discuss it first” “If the client buys a property now, is it going to place them in a position of financial difficulty, and are they at risk of being in adverse credit all over again? Ultimately, it’s about treating the customer fairly.” Drake also agrees that it is important to look at why the client already has some adverse credit. He says: “First and foremost should be the question, why? How has the customer got into financial difficulty? It’s vital as brokers to understand this and adapt the service to address it. “Secondly, are we 100% certain that in consolidation cases we are placing the customer into a better financial position? It’s important to understand at what point in the future the adverse will be considered spent, so we can then assess whether moving the customer to a cheaper mortgage would assist them. “And finally, be comfortable the customer is able to maintain the payments and therefore start their journey to recovering their credit file. Any bespoke tips and advice we can give each customer as to how they can then stay out of adverse credit territory, we also find to be hugely valued.” Aston believes one of the most important things a broker can do is to manage the client’s expectations around pricing and timeframe. “A borrower may not understand the extra levels of due diligence needed within a lender’s underwriting process on these cases. It’s vital that you set expectations early,” he says. “I would also advise getting as much background information as possible, in order to paint the best and most accurate picture of your client’s risk profile in order to appeal to the ‘common sense’ side of an underwriter, as opposed to matching the borrower with set criteria that may not always fit.” As long as borrowers continue to have access to easy credit, it is inevitable that there will be a portion of clients who suffer the occasional blip, whether it be a missed loan repayment, credit card or mobile phone bill, or something bigger such as bankruptcy or a County Court Judgment. As the financial strain brought about by COVID-19 continues, the adverse market will likely play an everincreasing role within the wider mortgage ecosystem, as minor credit glitches potentially become more commonplace for many borrowers. www.mortgageintroducer.com

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07/07/2021 10:44:49

SPOTLIGHT

PEPPER MONEY

Making a difference Mortgage Introducer spoke to Paul Adams, sales director at Pepper Money, about the lender’s most recent Adverse Credit Study, the learnings for brokers, and what Pepper is doing to help improve financial inclusion You recently released the latest version of your Adverse Credit Study, what were the main findings?

The headline results from the study were that 7.05 million people were considered to have adverse credit as a result of missed credit payments in the last three years. Of these, there are 880,000 who plan to buy a property in the next 12 months. If we assume that there are maybe 20,000 brokers active in mortgage advice, that’s the equivalent of more than 40 customers with adverse credit per broker – and this is before you consider remortgage cases. It’s a big opportunity for brokers to make a difference to people’s lives. People will need the reassurance of professional advice, particularly if they have experienced a difficult time financially during the pandemic. A clear trend identified by the research is that, just as the virus does not affect everybody in the same way, the financial impact is not distributed evenly, and people with adverse credit have suffered greater financial upheaval than the general population. According to the study, whereas less than a quarter of the general population say their income has decreased in the last year as a result of COVID-19, more than a third (36%) of adults with adverse credit say the pandemic has resulted in a reduction to their income. It looks like this has driven an increased reliance on credit – 24% of people with adverse credit say their use of credit has increased compared to 12 months ago, whereas this is the case for just 13% for the general population.

ADVERSE CREDIT JULY 2021

Why is it important that brokers take notice of research like this? As we emerge from the pandemic, the safety net of government schemes will be withdrawn, and it is likely that we will see more people whose financial lives will continue to be shaped by COVID-19, becoming more complex in the process. Those customers who have been impacted are in danger of feeling disenfranchised by the market. Research like the Pepper Money Adverse Credit Study shines a spotlight on this group of customers and provides brokers with the insights they need to be more effective in helping them. This particular study focuses on adverse credit, of course, but there are many ways that people’s financial and working lives have changed during the pandemic. For example, information gathered from Companies House shows that there was a record number of new companies formed during 2020, with more than 770,000 registrations. These people are customers and potential customers. They often won’t be served by the high street and frequently won’t know where to turn, so there’s a big opportunity for brokers here, and it’s important that we promote greater financial inclusion. What can brokers do? The first thing is to properly engage with the specialist market. However you choose to do it, find a way that works for your business and means you are able to www.mortgageintroducer.com

“These people are customers and potential customers. They often won’t be served by the high street and frequently won’t know where to turn, so there’s a big opportunity for brokers here, and it’s important that we promote greater financial inclusion” offer your customers solutions that meet their changing circumstances and requirements. This is important, as you need to have access to lenders that are geared up to underwrite cases on an individual basis. As has been said on many occasions, this situation is unprecedented, and that means traditional scoring models are not well equipped to make lending decisions based on assumptions and modelling. Specialist lenders not only have the criteria to lend to customers with changing circumstances, they also have the right operating model, built on individual underwriting rather than automated processes. This is why some specialist lenders, like Pepper, have excelled in service delivery in recent months, even as application volumes have risen. Working with specialist lenders with a proven operating model is an asset for brokers. The second thing to do is to be proactive in communicating with new and existing customers. The Adverse Credit Study found that online research has overtaken recommendations from friends and family as the way that most people would choose to find a mortgage broker. So, get online and make sure your website accurately reflects your services and values, and communicates who you are able to help. Make use of social channels to extend your reach and target one review site, encouraging your customers to leave positive reviews. More and more customers are conducting research online before speaking to a broker, and the more that brokers can enhance their digital presence, the better chance that more customers will understand the benefits of professional advice. What is Pepper doing to improve financial inclusion? First, we are doing what we do well, and that is lending to customers whose circumstances mean they are not well catered for by the high street. We’ve remained open for business throughout the pandemic, and we’ve been growing our lending again since the summer of last year, making ongoing enhancements to our product and service proposition so that we are better equipped than ever to help more customers. → www.mortgageintroducer.com

Paul Adams

SPOTLIGHT

PEPPER MONEY

“Make sure your website accurately reflects your services and values, and communicates who you are able to help” We’ve actually grown our underwriting specialist team by two-thirds since the beginning of the year. At the start of 2021, we had a team that consisted of 15 case owners who are allocated at the point the application is submitted to provide consistency and support broker partners. By the beginning of May, this number had grown to 25 following a period of recruiting a number of talented, high-calibre individuals. We’re also broadening our proposition to help new groups of customers realise their ambitions of home ownership. For example, we recently launched a Shared Ownership pilot, with plans to roll out our final proposition to the whole market in the near future. The launch into Shared Ownership mortgages is part of our plans to expand our proposition to support affordable home ownership schemes and help more hopeful homeowners to buy their own property. The launch was a natural next step for us, as we knew there was demand in the market for a dedicated proposition to provide competitive specialist lending to customers who want to access the property market through affordable home ownership schemes. As with all of our mortgages, our Shared Ownership proposition will be supported by expert underwriters who take an individual approach to assessing every application on its own circumstances and merits. We are also making plans to launch into other areas of affordable home ownership in the future. Aside from this, we are exploring how we can partner with charities such as LifeSavers Charity, which is part of Just Finance Foundation, to help raise funds for an innovative, values-based financial literacy programme that gives children the knowledge, skills and attitudes to manage their money wisely. This is a very important piece of the puzzle, as better financial education is crucial for greater financial inclusion. Is corporate social responsibility an area of growing importance for Pepper? It has always been important, but I think we are seeing many businesses and individuals now realising that they have to take a more proactive approach in order to effect real change. Sustainability is a good example here, and we recently announced our partnership with Ecologi, which is a climate positive organisation that plants trees and funds carbon reduction initiatives to combat climate change. The partnership means that Pepper commits to provide ongoing financial support to Ecologi to

ADVERSE CREDIT JULY 2021

fund its tree planting and carbon reduction activities. Importantly, we can measure how many trees we have been responsible for planting and how much carbon we have been responsible for reducing. Accountability is very important – it encourages you to work harder and do more. Looking to the future, what can we expect from Pepper in the latter part of the year? It’s important for us to ensure we remain committed to our plan of continual improvement. We never rest on our laurels and are always looking for more ways to help brokers and customers through enhancements to our products and service. By way of a simple example, we recently enhanced our broker telephone support, making it quicker and easier for brokers to speak directly with their dedicated case owner. Brokers can now connect directly to their dedicated case owner when they call Pepper, simply by providing the final six digits of their application reference number when requested to do so by the specialist lender’s telephone system. We give all brokers a dedicated case owner on every application and this direct contact with underwriters is an important part of our proposition. It may seem like a relatively small enhancement, but these small changes add up to create a superior experience for brokers all round. In terms of larger things that we are looking at, we improving the opportunity for home ownership through greater support of affordable home ownership schemes is certainly one element that we are working on. It’s also important that we continue to enhance our support for buy-to-let landlords. After all, the private rented sector houses a fifth of all UK households, so by supporting landlords we are also improving the choice and quality of accommodation or renters as well. We’ve already made improvements to our buy-to-let proposition this year, and we are working on making the range even better. Of course, we are also working towards the integration of Optimum Credit and Pepper Money, and our plan is to offer both first and second-charge mortgages under the Pepper brand. This will be an important step for our proposition, as we are able to offer brokers a more comprehensive set of solutions for customers who want to raise capital on their property. It will also be an important step for brokers. We know that consideration of second charges is not as high as it should be, and there are many customers for whom a second charge is a more suitable option than a remortgage. By bringing both propositions under one roof, we can make it easier for brokers to consider the two options for their customers and to make the right decision for their circumstances. Watch this space. www.mortgageintroducer.com

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It’s The Age of The Unlendables Are you prepared for the rise in complex credit mortgage applications? The mortgage market has been significantly impacted by the coronavirus pandemic, and specialist lenders have certainly not been an exception. But, as we begin to see the market return to normal, one thing is clear - post-crisis, specialist lending will be more important than ever.

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All of our criteria is based upon completion rather than at the point of application. All telecom CCJ/Defaults ignored if under £300. We’ll disregard all CCJs under £300 even in the last 3 months! We don’t credit score! We manual underwrite to gain a better understanding of the events that led to your customer’s financial blips.

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INNOVATION

Delivering better customer outcomes Charles McDowell Steve Seal managing director – specialist mortgages, managing director, HTB Bluestone Mortgages

dverse credit is by no means a new concept, but it’s not a term I believe we should use in the mortgage industry. Rather than using this term, which has negative connotations, instead we should refer to it as the complex credit market, as it encompasses a whole range of customers, not just those with ‘bad credit’. While the events of the last 18 months have certainly increased awareness and understanding of the specialist lending sector, it’s a crucial part of the mortgage market and one which has been recognised and serviced for many years. Nevertheless, there’s still progress to be made in terms of delivering better customer outcomes. FINDING OPPORTUNITY AMID CRISIS

The growth of the specialist lending market is only set to accelerate, given the changing credit profiles of customers aﬀected by COVID-19 who are unable to secure a mortgage with a mainstream lender. This represents a huge opportunity for brokers, who are going to be approached by more people looking for a helping hand. At Bluestone, for example, total completions for the year ending 30 June 2021 were up 49% compared to the previous year. Now is the time for brokers to really embrace this part of the market, to support a growing cohort of underserved borrowers over the short, medium and long-term. However, the mortgage market, like many other industries, has www.mortgageintroducer.com

been impacted by COVID-19, and specialist lenders are no exception. Many were forced to close their doors to new business and focus instead on supporting existing customers, while some withdrew altogether. For the lenders who have been able to reopen, now is an opportune time to start thinking about how to prepare for a post-COVID world. KNOW YOUR AUDIENCE

For brokers working in this sector, it’s vital to understand the types of customers that may come your way. Traditionally, the top customers we are most likely to see are self-employed, contractors, or first-time buyers who may have had a blip in their credit history. However, instances such as furlough and redundancy have meant that a growing number of customers are now in a more diﬃcult financial position than they were pre-crisis. For some, keeping up with regular payments has become a struggle, but for others the pressure has been even greater than this. For example, the number of County Court Judgements (CCJs) issued against consumers in the last quarter of 2020 was 73% higher than in the third quarter of 2020. 50 SHADES OF COMPLEX

There’s no one size fits all when it comes to complex customers. As such, it’s important that as an industry, we cater to their unique circumstances. Someone with a blip in their credit history, for example, will need a diﬀerent approach to someone who has been self-employed for many years. However, being able to provide solutions for borrowers who have encountered a setback, through no fault of their own, and help them purchase their dream home should be what motivates brokers working in this area of the market.

Brokers have a moral responsibility to support these customers, and have a crucial role to play in signposting those with complex credit to the lending options available to them. A significant proportion of these borrowers will be unaware of the fact that the complex credit mortgage market even exists, and if they’ve been turned away from a mainstream lender, they may think they have nowhere else to go. UNDERSTANDING THE INS AND OUTS

As more lenders look to bring solutions to market, the most important thing for brokers to do is to get comfortable with the range of lending solutions available, and understand which lenders oﬀer which products. Transparency is also key. There’s still a perception among brokers that specialist lenders can be diﬃcult to deal with due to the toing and froing that can take place during the mortgage application process. To tackle this, brokers must work proactively with business development managers (BDMs) and broker teams to provide all the necessary information, which will make for a quicker and easier process. COMMUNICATION IS KEY

From a lender perspective, ongoing support for brokers will be essential. With the market constantly changing, lenders must provide regular updates so brokers can stay on top of the solutions readily available. Lenders must also let brokers know the information they need and why they ask for it, to help streamline the process. Those who ensure this information is easily accessible and updated regularly will benefit the most. Our message to brokers is this: don’t be scared of the unknown. It may seem like a challenging market, but it’s one that is only set to grow given the ongoing economic uncertainty. With the right tools, education and partner, there is a clear opportunity for brokers to retain existing clients as well as support new ones, all while helping them to achieve their ultimate dream of home ownership. JULY 2021

ADVERSE CREDIT

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COMMENT

UNDERWRITING

Adverse credit in 2021 and beyond Claire Askham Charles McDowell key account manager, managing director – North and Midlands, specialist mortgages, Buckinghamshire HTB Building Society

s we slowly emerge from lockdown, the eﬀects of the pandemic are still apparent, and the challenges that people face with finances are continuing to impact their ability to apply for mortgages. Buckinghamshire Building Society understands that it has been a tough year, so we strive to oﬀer mortgages that are inclusive and provide people with a solution, to help them own their dream home. We are used to dealing with complex cases, and our human approach to underwriting ensures that even the most complex will be considered. CREDIT RATING VESUS VS CREDIT SCORES – THE DIFFERENCE EXPLAINED

A recent study by Haysto found that 22% of the 2,012 people they surveyed blame bad credit history as the main reason they are unable to get a mortgage. Furthermore, 70% of the sample are unwilling to even apply for a mortgage because they think their poor credit rating will prevent them being eligible. A number of recent cases reported in the media have highlighted that individual customers have been refused mortgages due to their credit score being low, but that when investigated, the reasons for this blip are minimal. Most recently, for example, a couple were refused a mortgage due to an unpaid mobile bill from five years previously, worth just £24. This can easily happen when people move homes, get divorced or change email addresses. www.mortgageintroducer.com

This kind of situation highlights the need for the human touch in the mortgage process and that element of common sense to evaluate the risk on a customer by customer basis. IF MY CREDIT RATING IS LOW, CAN I STILL GET A MORTGAGE?

There are a number of ways in which mortgage companies can evaluate someone’s eligibility. The traditional method, used by many high street banks, uses an indepth check of the person’s credit rating through a credit agency. This is a robust score, but it can be a lengthy process and does not take into account the reasons why that person’s credit score is high or low. In the case highlighted above, the customer is likely to be refused a mortgage on the grounds of an easily explicable oversight on a very small bill from years before. An alternative option is using credit searches, used by some building societies, including Buckinghamshire Building Society.

This method looks at cases on an individual basis, so it picks up any anomalies in credit scores. This method is primarily done manually by human – rather than computer – underwriters, which has the benefits of giving a more flexible and bespoke approach and providing those individuals with unusual circumstances or a lower credit score the opportunity to explain the situation to someone who will listen and find the right mortgage for them. HOW CAN WE HELP?

Buckinghamshire Building Society offers a portfolio of mortgage products for exactly that. Our Bucks Solutions range offers those customers with either impaired or adverse credit an opportunity to apply for mortgages, and this product offering currently makes up 16% of the total mortgages we offer, demonstrating the appetite from the market for such products. Terms and conditions apply. Tim Vigeon, head of lending at Buckinghamshire Building Society, says: “We pride ourselves on going above and beyond to find solutions for even the most complicated of cases. “Our human approach to underwriting allows us to look at cases on an individual basis to find the best solution based on that person’s individual circumstances.”

A human approach to underwriting

JULY 2021

ADVERSE CREDIT

Complex cases, made simple. Facing a complex case? At Together, we’ve been making the complex simple for over 45 years, and have the right products, service, knowledge and experience to help in a wide range of circumstances. You need an experienced underwriter who can see the bigger picture, and get to know the person behind the numbers. So whether you’re dealing with short deadlines, unusual income, less-than-perfect credit, or something else, you can count on us to make quick, informed decisions – without the fuss. Visit togethermoney.com/partners, or contact your preferred packager.

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COMMENT

AFFORDABILITY

A fresh start for those with adverse credit Charles McDowell Sundeepdirector managing Patel– specialistofmortgages, director sales, HTB Together

n the past, those looking to borrow with adverse credit were most probably facing significant financial challenges. Nowadays, however, it seems that more and more Brits fall into this category, simply because the way we live our lives has changed. As more of the population become self-employed, work varying hours, or face increases in their living expenses, their affordability is likely to be impacted. We don’t need to tell you that the effects of the pandemic have only added to this shift. There could be a number of reasons a hopeful borrower has suffered some damage to their credit over the last 12 months – particularly if their income suddenly changed. Perhaps they’ve previously been furloughed, required to reduce their hours due to a lack of childcare, or forced to start a new career following redundancy. Self-employed workers may also have missed payments because they’ve been unable to work during lockdown. The fact of the matter is, so many Brits who would’ve previously found it fairly easy to secure a loan or mortgage, now have a credit history that’s less than perfect, or an income that’s a little more complicated. The pandemic has shown us just how important adaptability is to survival, and as a specialist lender, being flexible is what we do best. However, many mainstream lenders continue to impose affordability checks and tick-box exercises which some are finding increasingly difficult to pass. Though nobody could have anticipated or prepared for the www.mortgageintroducer.com

pandemic, we at Together have had over 45 years’ experience supporting these businesses and individuals through diﬃcult periods, or where a credit blip has prevented them from securing the finance they need to fulfil their goals. Our skilled underwriters look at every complex application individually, getting to know our customers by asking common-sense questions about their circumstances. They certainly don’t rely on computer generated decisions. But what does this actually mean? First of all, at Together we’ll ignore any County Court Judgments (CCJs) or defaults under £300, because a missed phone bill during a national pandemic should not deem a customer unmortgageable. Those applicants who took advantage of a payment holiday and have now returned to making their monthly payments will also be treated as normal.

A fresh start for borrowers

Furthermore, we look at a customer’s credit history, not just their credit score, which means we can ignore any adverse credit over 12 months old when deciding a customer’s rate. Just because a credit problem occurred in the past – or during the first few months of the pandemic – that doesn’t mean they’ll need to pay more in the present. A recent survey commissioned by the Bank of England found that workers who were self-employed were most likely to have experienced a reduction to their income in the last year. For those who work for themselves – which many of our customers do – we’ll look at their last three months’ earnings, so they won’t lose out if they weren’t able to work during lockdown. It’s clear then that there are finance options available to those who’ve experienced some upheaval during the pandemic. So what’s the challenge? Well, many of these Brits simply don’t know about them – especially if this is the first time they’ll be labelled as a ‘complex’ case. Now that we’re approaching the other side of the pandemic, there’s a real need for brokers to work with specialist lenders who are prepared to see beyond the basic, and get the right support for their clients. In order to unlock these options and make them more accessible, brokers must understand the breadth of lenders and products available, and take a lead in educating the market. After all, knowledge is power. We already work with a number of packagers which are highly experienced in the specialist lending market, and are here to support brokers who have a case that’s perhaps more complex than most. We must look at this time as a new beginning for the lending market. By working together, we can all play our part in helping these customers achieve their ambitions without any unnecessary barriers simply because the pandemic has caused some changes in their lives, as it has for all of us. Together, we can empower these borrowers by giving them knowledge of their options, and giving them back some of the control which they may have lost during the pandemic. JULY 2021

ADVERSE CREDIT

ROUND TABLE

ADVERSE CREDIT

ADVERSE OPPORTUNITIES

Jake Carter outlines the discussion at the latest Mortgage Introducer round-table, which looked at opportunities within the adverse market, common reasons for poor credit, and the role of technology

oronavirus has been at the forefront of everyone’s minds since March 2020, but with the vaccination programme progressing, a return to normality edges closer. Far from being out of the woods, howeever, the ramifications will still be felt for some time, as people’s finances have been impacted significantly and in various ways. Approximately 11.5 million jobs from 1.3 million different employers were furloughed in the UK as part of the government’s job retention scheme. The most recent unemployment figures for the period of January to March 2021 found that it stood at 4.8%, according to the Office for National Statistics (ONS), and it is unclear how this might change once the furlough scheme eventually winds up in September. Furlough and unemployment, along with the numerous other effects and strains of the pandemic, have served to increase the number of individuals with adverse credit. While this is not a state of affairs to be celebrated, the fact remains that a rise in credit complications has created a substantial opportunity for growth among those lenders that specialist in helping borrowers 1 07/07/2021 otherwise Moneyfacts-Ad-Pepper-Money-180x29-Version2.pdf cut off from sources of finance.

At Mortgage Introducer’s roundtable, a panel of experts from Together, Simply Adverse, Pepper Money, London Money, Try Financial, Buckinghamshire Building Society and Charter HCP spoke about whether the adverse market will continue to grow, the potential for rising rates, and if open banking will help paint a better credit picture.

15:18:20

UNDERSTANDING ADVERSE CREDIT Credit blips and the potential for future instability are increasingly becoming the norm, says Paul Adams, sales director at Pepper Money: “From our own research there are seven million people in the UK who would consider themselves to have adverse credit, which is as a result of missed payments, defaults and [County Court Judgments (CCJs)]. “What we also seek to identify is how many of those are looking to purchase a property within the next 12 months. The latest study we did on this topic revealed that there were 880,000 people looking to buy over the next year.” Adams notes that it is difficult to tell whether this number will grow in the near future. He says: “The safety net of the government schemes currently in place will eventually be withdrawn, which

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ROUND TABLE

ADVERSE CREDIT is likely to result in further financial complications for some.” Phil Quinn, head of national accounts at Together, explains that adverse credit mortgage offerings have become more accessible in recent times, and that it is important that consumers are aware of the options available to them. He adds that not only would the market benefit from greater awareness, but there is also a lack of clarity for many consumers around their own situation, and that many individuals are unclear on how credit scores work in the first place. “Education is the real key here – the better people understand their finances the better outcomes consumers will have,” Quinn explains. Claire Askham, key account manager at Buckinghamshire Building Society, agrees, adding that brokers have an important role to play here too: “A lot of customers can access their credit file and see all of the information, but most of them do not fully understand it. Raising awareness of aspects within the credit file is essential – we have cases where the customers are supposedly clean, and then we run the search and they are near enough bankrupt. “A broker must look into this information prior to it being passed on to lenders. Being able to provide the background to the customers helps us as a lender take a view on the client’s situation, to help them and to respond much quicker to the broker.” Adam Hinder, managing director of Simply Adverse, adds: “By not checking, the broker is making the assumption that their customer’s credit file will be satisfactory enough for a lender, despite all lenders having specific criteria on credit files as to what they will and will not lend on.” Hinder goes on to say that there is a distinct difference between someone’s credit score and their

“Competitive pressure is always going to keep rates in check; brokers are actually usually surprised at how cheap the rates are in this area of the market” PAUL ADAMS Moneyfacts-Ad-Pepper-Money-180x29-Version3.pdf 1 07/07/2021 15:18:47

“Through improvements with technology, open banking makes it a more seamless process for the broker and in turn the customer” PHIL QUINN credit profile, explaining: “Often people want to refer to Experian data, which presents a score out of 999; however, this does not offer enough of a check into someone’s financial history and background.” Aaron Scott, brokering manager at Try Financial, says: “A simple act of stubbornness can be their downfall. I have had customers who are refusing to pay a £50 bill for one reason or another, and they do not realise that this can result in a default and cripple their credit.” REFERRAL OPPORTUNITIES The pandemic has pushed more individuals to reevaluate their financials, which has presented an opportunity for those within the sector to present more options to consumers who are increasingly aware of the importance of finding the right product to suit their situations. Terry Pritchard, director of Charter HCP, says: “There is a massive opportunity to help people who have had credit impairment occur during this period, and I think we need to look back on the financial crisis to what we learned then about lending money.” Hinder adds: “We are seeing more and more lenders offering schemes to consumers, which is a step in the right direction and an opportunity which has just begun to be filled within the market. “Schemes such as Help to Buy and Shared Ownership – lenders have started to offer these and incorporate them into their own offerings, which is really positive for the industry.” The risk, however, is that brokers themselves do not understand where there is an opportunity to reach out to the adverse credit market. Hinder says that if a broker is approached and asked a question, they should not turn down a customer if they do not know the answer. In this instance, referrals are an important element of the market. →

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JULY 2021 ADVERSE CREDIT

ROUND TABLE

ADVERSE CREDIT

“A lot of customers can access their credit file and see all of the information, but most of them do not fully understand it” CLAIRE ASKHAM

Adams says: “We see this at Pepper Money, where cases have been rejected simply because they have not been understood, and this is a real big problem within the industry. Brokers are rejecting clients and it’s resulting in them believing they are ineligible forever; however, of course this is not the case. “It’s understandable that brokers are incredibly busy currently, with the surge in demand that we have seen over the last year, but they must refer clients to specialists rather than just declining cases.” In addition to simply broadening understanding outside of the market and generating referrals, Scott identifies second-charges as an area which this industry could potentially look to fill out. He says: “I think second-charges are a massively underserved part of the market; I have customers who are unable to remortgage because they are on a 5-year fix, or their affordability does not stack up. “A lot of people do not realise that a second-charge could be a good way to consolidate debt and improve their credit for future remortgages.” LOOKING DEEPER Catherine Beaumont, mortgage and protection consultant at London Money, explains that when looking into customers with adverse profiles, she must understand their full credit history. “The pandemic has shown us how quickly someone becomes unable to pay for their mortgage, or other large financial expenses,” she says. “Unfortunately, the pandemic resulted in many living month-to-month, reorganising their finances to try and pay for food and their bills.” Beaumont points to the furlough scheme, and notes that while it was a positive, it meant that many were receiving 20% less income on a monthly basis. While Moneyfacts-Ad-Pepper-Money-180x29-Version4.pdf 1 07/07/2021 in theory this might be dismissed as a one-off in a

time of crisis, it arguably suggests, on the one hand, that this person might have to be enrolled on future furlough schemes, or worse, that their job does not have a stable enough foundation to weather the storm. Naturally, a deeper approach has to be taken to fully understand the nuances. Pritchard says: “We have to take a serious view on cases that have been impacted by the pandemic. If you wrote many on a credit score basis they wouldn’t get through, so you do have to have an open mind.” He adds: “There are many financial complications caused by COVID-19 that will not catch up for six months to a year, so there needs to be more done to assist these consumers.” Quinn agrees that the financial industry will likely still be seeing the repercussions of COVID-19 over the next few years, and believes that the regulators must step in to aid businesses. “There could be a storm to come,” he says. “We are in the position now where we were nearing the light at the end of the tunnel, but we are hearing whispers of another lockdown in the autumn. “Things are just being kicked down the road. If you look at furlough, payment holidays, business interruption loans, it is polarised in a way, because you have those who have been able to save extra through not being able to go out, versus those who have been furloughed or needed to resort to a loan. “The Financial Conduct Authority [FCA] must start to look at how it can assist those affected by coronavirus in the financial industry and begin to find solutions to resolve the issues faced.” Pritchard adds that there will likely be a decrease in property prices, although he does not think it will be as bad as originally imaged. He says: “I think there will be a bounce on the value of properties in the UK, but I do not imagine that it

“Adverse credit is likely to be an ever-growing part of many people’s future, so there is a large opportunity for brokers to fill this gap” TERRY PRITCHARD 15:19:41

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ROUND TABLE

ADVERSE CREDIT will be long until it returns to normal levels. While the government has been criticized during the pandemic, I think it has done its best to come up with ideas and solutions to lessen the negative impact that the pandemic has had on the country.”

“If someone has a ton of defaults last month, but they have just won £150,000 on the lottery, then you also can anticipate what you are in for.” Scott agrees: “It is important to get the story behind every client to better understand them and place their case with the most appropriate lender. “Defaults should be looked at on a case-by-case basis; for example, I believe it is different if someone cannot pay a bill, or if they have chosen not to pay a bill through a disagreement. “There is a story behind every adverse client, which is why manual underwriting is essential for this area of the marketplace.” This need for in-depth information necessitates work and communication from the broker, in order to understand the full story, relay it to the lender, and if possible add their own professional analysis and input. Quinn also outlines the importance of manual underwriting within the specialist market, due to the

CHANGING RATES With the market undergoing a series of changes due to the current climate, many have been questioning whether rates are expected to reduce or increase in the future. Adams says: “I think competitive pressure is always going to keep rates in check; brokers are actually usually surprised at how cheap the rates are in this area of the market.” He adds that, again, this is an area in which education needs to increase, so that consumers can make the most out of the offerings available to them. “In the high street, you hear about free legals, low rates and other such bonuses, but what people often do not realise is that these offerings are available on our side of the market as well,” Adams says. Askham agrees: “At Buckinghamshire Building Society, brokers are often surprised at the rates we offer to those clients with adverse credit. Those with serious debt issues we may not be able to offer our most competitive rates, but customers who have undergone an unfortunate life event which has led to adverse credit we can usually help.” Scott notes that it can be difficult in some circumstances to persuade customers to accept higher rates due to their adverse credit. He says: “Some consumers believe that they should be offered a lender’s prime rate, so it can be hard to get them to understand that this will not be possible; however, most with adverse credit will happily accept the rate they are given as they are usually simply happy to be able to get a mortgage.” IMPROVING UNDERSTANDING Credit scores rarely tell the whole picture, and lenders are often looking for more in order to assess whether a client is eligible for a mortgage, and how much that product will cost. Hinder goes on to say: “If a customer can show how much they have been spending on renting and maintaining other expenses, then you know that they will likely be a good fit for the majority of lenders, even 1 07/07/2021 if they hadMoneyfacts-Ad-Pepper-Money-180x29-Version5.pdf a credit blip several years ago.

“Brokers are rejecting clients and it is resulting in them believing they are ineligible forever, however of course this is not the case” ADAM HINDER

complexities of the cases, noting that without this, far fewer cases would progress to completion. He adds: “I believe we will always maintain a manual approach within this area of the market, because while technology has improved, I do not think it will ever be at the level it would need to be in order to replace manual underwriting.”

15:20:03

THE ROLE OF TECHNOLOGY There are a number of elements which are not included in a credit score, but which market commentators agree have a considerable impact. Many first-time buyers, for example, consistently pay rent in amounts higher than their prospective mortgage payments, without this being taken into account in the course of a surface-level affordability assessment. →

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JULY 2021 ADVERSE CREDIT

ROUND TABLE

ADVERSE CREDIT While discussion around this issue has come to the fore recently, Quinn does not expect anything to change overnight, and says: “I think we are on a journey. We will see some improvements over the next 12 to 24 months, but as it stands it shows enough detail for a lender to make a decision. “Through improvements with technology, what we will be able to do with open banking is make it a more seamless process for the broker and in turn the customer. However, these improvements will not make it any less important to understand the customer’s background and story.” Pritchard says: “I hope technology does not start to rule over everything again in the market, because manual underwriting is essential within this space. “A company I know at one point was doing £130m per month in the adverse mortgage market; however, when it tried to go fully into technological processes, its default rate went up 25%. “This is because they were writing cases that they should not have been and were missing cases that should have written. “I do think it would be a massive mistake to go fully automated within this area of the marketplace.” Nevertheless, technology does still have a role to play, Askham says: “At Buckinghamshire Building Society, manual underwriting is our niche, we are currently looking at our end-to-end process and are working on how to improve how our brokers interact with us. “We have looked at ways we could automate parts of the process to streamline the process some areas do work but not all for our business model with our manual underwriting.” Beaumont notes that as a mortgage and protection consultant, she finds it helpful when a lender allows for a manual underwriting approach on cases. She says: “Common sense manual underwriting helps the process, if we can provide the background story on the client, then usually with this approach a solution is found.” Similarly at Pepper, Adams says preparation for the future has not taken the form of moving towards increased automation, and the business is instead increasing its underwriting team by two-thirds. He explains that Pepper has sought to improve accessibility to the correct people for brokers, and that

““The pandemic has shown us how quickly someone becomes unable to pay for their mortgage, or other large financial expenses” CATHERINE BEAUMONT

ADVERSE CREDIT JULY 2021

“A lot of people do not realise that a second charge could be a good way to consolidate debt and improve their credit for future remortgages” AARON SCOTT

this is where technological improvements have been funnelled into. Askham says: “Just because it is manual rather than an automatic process, this does not mean it will necessarily take longer, which I think is a stigma that puts a lot of people off, but it is not the case.” However, Hinder adds that there is a balance to be struck: “While manual underwriting is everyone’s preference, it is not easy to do this on scale. If the individual dealing with the case takes a week’s holiday or if they are off sick it causes many issues, so there are a lot of factors here to consider. “We need to make the processes quicker, but the critical human touch needs to remain.” ENGAGING OPPORTUNITIES The adverse credit market, while it can be complex and nuanced, holds ample opportunities for those brokers who take the time to actively engage in it. Hinder says: “I think coming out of these testing times, factoring in self-employed income, but also general employment changes, I think there is a huge opportunity for brokers not already engaged in the space to get involved.” Scott agrees: “The market for adverse is absolutely huge. It is a wonderful time for us involved in the sector, as there is an opportunity to help a lot of clients.” In fact, when considering the healthy growth being seen in the overall specialist market in recent years, and particularly in the wake of the pandemic, the adverse credit sector is arguably the driving force. Therefore, it is imperative that brokers previously unfamiliar with it start to take this part of the market seriously. “If the pandemic has taught brokers anything, it is to diversify on their business model because there are too many brokers who are just high street focused,” says Quinn. “So this is now a good opportunity for them to take a step back and re-evaluate exactly what they can do in order to assist clients.” Pritchard concludes: “Adverse credit is likely to be an ever growing part of many peoples future, so there is a large opportunity for brokers to fill this gap. “An estimated third of people across the UK are expected to have some degree of financial difficulty over the next 24 months, so I think there is a huge scope for the market to grow.” www.mortgageintroducer.com

Mon

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07/07/2021 10:11:27

COMMENT

MARKET

What did we really learn in 2008? Terry Pritchard director, Charter HCP

he answer to the question in the headline is, I hope, ‘a lot’. But I expect little given the fact that the new generation of directors and CEOs I have spoken to seem to have forgotten the last problem we had with this market, or they simply choose to ignore the data. Well, let me remind you that we allowed the underwriting of sub-prime debt to become distorted, and the quality of collateralised debt obligations (CDOs) in turn became so poor the market eventually collapsed. While there were many other contributing factors, the fact is that essentially we allowed our funders and owners in the US to dictate how we, the conservative Brits, underwrote cases where the borrower for whatever reason had impaired credit.

With impaired or sub-prime loans everyone has a sob story, and we have to be aware of that and look at the whole picture. I promise you can easily spot a habitual bad attitude to credit by looking at someone’s bank statements alone, not for the last three months but the last three years. COMMON SENSE, FAST

Now, there are many other contributing factors, but to make a good sound underwriting decision you need to embrace both technology for speed of process and good common sense underwriting at the same time. If you do that, then you will end up with a book of loans that will not only be sound, but more importantly good for future investment. People tell me that securitisation is back in a number of different forms. Although the jury is out until we see real evidence that this is the case, I really do believe it is an essential tool to aggregate this market over what may be a difficult few years for some.

The pandemic – yes that old chestnut – has put millions of people into financial difficulties. It has also –to be cynical – given others an excuse to keep their cash and not service their debts, even though they could. I am sure that the credit reference agencies will find it impossible to distinguish between the two, so it is up to the lenders to work out who is pulling wool and who is genuine. Otherwise, there will be a large number of people unable to borrow even though we are assured that much of the pandemic influenced credit issues will be ignored – which I don’t believe for a minute. APPOPRIATE BEHAVIOUR

This very problem exposes how vulnerable some people’s financial position is, so you cannot ignore them. What we can do is design a product that is more empathic in times of hardship, and constantly review people’s credit position. What I am trying to say is, please use the data we have wisely, be grown up about the application of said data, and act appropriately for the good of all. This sector will rise again, so lets just not make the same mistakes we did before. Be safe and look after yourselves, as nobody will do it for you, we have enough of our own problems!

VANITY INSANITY

We were driven by volume rather than quality – volume is vanity, quality is sanity, never a truer word spoken in jest – and as such lost sight of the fundamental principles of our businesses, which was to write good quality loans with risk pricing and loan-to-values (LTVs) in line with reality. Subsequently, the world came to an abrupt end when securitisation virtually ceased to exist. Taking all that into consideration, the only reason I am writing this is to remind those currently in power to take a long, hard look at the sector and design their internal policies and processes around a robust credit and underwriting platform – one that consists of both technology and manual processes.

ADVERSE CREDIT JULY 2021

Those who do not learn from history are condemned to repeat it

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07/07/2021 10:44:49