Adverse Credit – The Market in Focus by mortgageintroducer

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ADVERSE CREDIT www.mortgageintroducer.com

April 2022

THE MARKET IN FOCUS

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31/03/2022 16:04

EDITORIAL

COMMENT

Not so negative

Editor Jessica Bird Jessicab@sfintroducer.com Deputy News Editor Jake Carter Jake@mortgageintroducer.com Commercial Director Matt Bond Matt@mortgageintroducer.com Advertising Sales Executive Jordan Ashford Jordan@mortgageintroducer.com Campaign Manager Esha Gossain Esha@mortgageintroducer.com Production Editor Felix Blakeston Felix@mortgageintroducer.com Head of Marketing Robyn Ashman RobynA@mortgageintroducer.com CEDAC Media Ltd Signature Tower 42 25 Old Broad Street London EC2N 1HN

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dverse credit is a daunting subject. For many of us, particularly with the lack of comprehensive financial education in this country, it is shrouded in complexity, mystery and – ultimately – deeply negative connotations. We all know to some extent what constitutes praiseworthy credit behaviour, but for many this is an abstract and conflicting conversation. Should I be spending on a credit card, and to what extent? Is ‘no rating’ better or worse than a bad one? Is a black mark there forever if I make a mistake? It can be dizzying to consider the small decisions that could have a big impact, those made when we were young and didn’t know any better, in a fleeting moment clicking ‘buy now, pay later’ at checkout, or missing a bill payment because the letter fell behind the couch. This is all before a prospective borrower gets to the stage of applying for a mortgage and faces that seemingly insurmountable ‘no’. With finances only getting more squeezed as this year presses on, it might seem like there is a bleak outlook for those with a complex or credit impaired financial history. Enter the specialists. This supplement looks to outline not only the ways in which the customer demographic in the adverse credit market has changed and evolved over the years – particularly post-COVID – but more importantly, what can be done to help them. This borrower cohort is only going to grow, and while that might seem like a gloomy outlook, it doesn’t have to be. Finances are simply becoming more complex. Luckily, there is a dedicated market full of experts ready to help.

Contents 4 Cover: Post-COVID credit Jessica Bird asks how this market has evolved post-pandemic, and what brokers really need to know about serving a growing cohort of clients 10 Spotlight: Adverse credit? Ask a specialist Jessica Bird and Paul Adams discuss the ramifications of COVID-19 on borrowers with adverse credit 13 Claire Askham Uncertain outlook means more clients with non-standard histories 15 David Binney Specialist lending in the mainstream 17 Mark Todd Adapting to the evolving complex credit landscape 19 Buster Tolfree One swallow does not a summer make 20 Round-table: Holding the keys Mortgage Introducer’s panel is asked whether this market is ready to cope with the new normal

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Post-COVID

CREDIT

Jessica Bird asks how the adverse credit market has evolved postpandemic, and what brokers really need to know about serving this growing cohort of clients

uring the Global Financial Crisis, an environment of low interest rates, easy credit, and toxic sub-prime mortgages led to a period that shaped the world to an extent that was thought to occur only once in a generation. That is, until the onset of COVID-19. The pandemic was a different kind of crisis, but when COVID-19 hit our shores, it found a housing market that had learned important lessons and put many safeguards in place – not least among which is a fundamental approach to responsible lending. Nevertheless, the events of the past two years have hit much of the population hard, and will have pushed many more into adverse credit or complex financial situations. So how has this market evolved to meet the needs of the next generation of customers? COVID CHALLENGES For some, the pandemic was a chance to shore up their finances. Lack of commuting meant daily savings while still being able to work, while big expenses such as holidays took a back seat. For many others, however, it meant long periods of furlough at 80 per cent pay, or even full redundancy as businesses closed their doors. Even with government support, pockets were squeezed. Paul Coss, co-founder and chief customer officer at Haysto, says, “It all depends on the person. For example, most people who are self-employed were affected by COVID-19 – it could have been that they were focused on maintaining payments such as rent, or car finance, so they missed payments on their credit card.” The advent of new initiatives such as mortgage payment holidays provided respite in some quarters,

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but loose suggestions about landlords passing the savings on to their tenants often fell on deaf ears, leaving many to fall into rent arrears. Meanwhile, those payment holidays and support schemes themselves caused complications from a credit perspective. John Pemberton, senior sales and business development manager at Norton Home Loans, says, “Probably half of the people that we are dealing with who had forbearance have had it incorrectly logged on their credit reference file. So people are looking like they’re three or four payments down on something, but they actually had a holiday period for three months. “So it’s important to ask the question, and that’s a big bit of advice, [about] ensuring the customer’s credit file is in place and they’re aware of what’s going on there.” Coss notes that COVID-19 has also had social and personal ramifications, beyond just the financial, such as leading to higher rates of relationship breakdowns, which can cause adverse credit if responsibility for bills becomes obscured or complicated. The challenges faced during COVID-19 make it all the more important to understand the detail of a borrower’s case. Missed payments might denote a habit of poor money management and overspending, raising questions as to affordability for a mortgage; alternatively, it could be linked to a one-off life event, with the borrower proving an otherwise solid prospect. NOT OUT OF THE WOODS Despite the recent lifting of restrictions, the pandemic is far from over, and will continue to be a part of everyday life for the foreseeable future. Added to this is the context of international uncertainty, rising interest → www.mortgageintroducer.com

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COVER rates, and a cost-of-living squeeze. There is also the fallout from pandemic spending and forbearance to consider, says Coss. “There has been a lot of ‘free money’, such as Bounce Back Loans, or ‘buy now, pay later’. Money has been very cheap over the past couple of years, and what we’ll see going forward, without a doubt, is a massive bite on people’s disposable income. “Whenever you turn the news on now, it’s all rising rates – whether it’s energy bills or food – but people’s wages aren’t going up as much. That will start to bite and there will be a wave of new cases coming through.” Coss notes that while some people may have been able to juggle all the challenges faced during the pandemic, they might no longer be able to manage. Nevertheless, for lenders the picture has seemingly returned to what it was pre-pandemic, according to Matt Harvey, complex finance specialist at The Loans Engine (TLE). He says, “Lenders will always take a more cautious approach when there’s a big unknown factor such as the pandemic, but as they’ve got more comfortable with the housing market following that initial uncertainty, lenders have increased maximum loan-to-values (LTVs) and enhanced their criteria. From a lender appetite and criteria perspective, there are plenty of people looking to lend. There’s a high level of competition. “From a consumer perspective, there has been lower demand over the past 18 months or so, because people just weren’t able to spend money. Now we’re seeing that they’re starting spending again, are looking at debt consolidation, and are more likely to have instances of adverse credit, and are getting declined by the high street banks.” CONSCIOUS OF CREDIT There is a lot of misinformation and misunderstanding around the more peripheral elements that feed into a credit score. For example, Pemberton says, many people are unaware that missing a utility bill can affect their credit. In addition, the recent rise of ‘buy now, pay later’ schemes, which many do not realise are a form of credit in themselves, could be to blame for many borrowers slipping into the poor or adverse space in the future. “The problem sometimes is that the customers don’t think they’ve got a problem,” says Pemberton. “It’s about education. Education is always a battle, because you have to be in people’s faces to educate them.” There are also other complications, including life events such as divorces, that can have a knock-on effect on bill payments and ultimately disrupt a person’s credit without them quite realising the implications. Coss notes that this lack of awareness starts – and can be dangerous – at a young age. Without practical financial education in schools, young people are at risk of making financial decisions that could affect them negatively down the line. “The young generation are not aware of how to manage their finances,” he explains. “Your credit report

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shows a six-year history, so what happened when they were younger, naïve, and not thinking about the future can have a big impact.” In addition, borrowers and brokers need to be aware that it is not always financial difficulty or poor management that might lead to a blip. With incomes becoming more complex and diverse, higher earners might also face challenges if they rely on commission or bonuses, for example. LEAVE IT TO THE SPECIALISTS High street lenders tend to cater for volume and stick to more vanilla cases. While important, this means these banks tend to shrink from even the simplest credit complication, leading to borrowers being turned down when they might sail through in the specialist market. Harvey says, “We get cases regularly where the mortgage broker has classed it as adverse, but we’re talking about a couple of missed credit card payments in the last two years, which most of us in this market don’t really bat an eyelid at. That’s a very clean case compared with what we would normally see at the extreme ends.” It is important, then, that brokers be aware of the specialist options available to help those customers who might feel hopeless after a rejection from one of the big banks. “You could have somebody who has recently gone self-employed, and whose bank wouldn’t consider them because they need trading accounts over two or three years,” Coss explains. “However, there are plenty of specialist lenders which would cater for that. “Equally, you might have someone who missed a few payments during COVID-19 because they weren’t able www.mortgageintroducer.com

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to work, but are now back on their feet. The mainstream isn’t going to accommodate that, but specialist lenders would.” He adds that there needs to be greater awareness among consumers of the diverse options available to them beyond the high street. “Even if they are aware, people often think the rates are going to be sky-high,” he continues. “In reality, they’re not that much higher than the standard variable rate (SVR) for mainstream lenders.” This need for education affects those within the mortgage market as well. Often, a borrower might have spoken with a Financial Conduct Authority (FCA) accredited broker and been told they would not get a mortgage, whereas a specialist might have a different outlook. TECH AS AN ENABLER In a world where algorithms are often the cause of relatively simple adverse credit cases being rejected, it might be easy to dismiss technology. Indeed, with a topic as delicate as this, there will always be a central role for human advisers, BDMs, and underwriters. However, Harvey notes that brokers should understand the benefits of sourcing systems and criteria tools. In a market that is growing ever more complex, with changing criteria and an evolving product set, technology should provide those crucial first steps in narrowing down the options. There are some things to be wary of, he adds, such as sourcing tools tending to favour the larger lenders. TLE has countered this by developing its own in-house sourcing tool, but there is a way to go in the rest of the market. “That helps us massively,” Harvey says. “It helps us www.mortgageintroducer.com

spot opportunities, and compare second charges and first charges. But I do think for the average mortgage broker on the high street, the tools available to support them could do with improving, and that would help them find lenders faster – the more that technology platforms help that the better, but especially for the client.” For Haysto, Coss agrees, the approach is about “using technology, but not taking away that nuanced approach.” He continues, “If you’ve got a difficult situation, you can’t talk to a computer about it. What we do is empower people to speak with someone who fully understands their circumstances, and then use technology to empower them to become a homeowner if it’s right for them.” Technology can also be beneficial in its ability to provide a deeper, more granular view of an individual’s situation. Innovations like open banking, for example, can help borrowers map their payment habits in more detail. The credit report sector has also progressed to providing much speedier updates. Whereas before, the work done by borrowers to repair their credit might →

Different circumstances John Phillips national operations director, Just Mortgages

‘A

dverse credit’ is not quite the right term for discussing the recent trend. ‘Different circumstances’ is a phrase that more accurately reflects the current market. Although instances of adverse credit – or different circumstances – are increasing, there is a variety of factors at play that are driving this trend. People are earning more on average, but their sources of income are shifting, with some earning more from commission and bonuses, and this is causing some minor credit issues. Recently, most adverse comes from these small credit issues, with missed payments on things like phone bills, energy bills, and the like. And while instances are increasing, lenders are more open to working with those with blemishes on their financial records. While brokers’ expertise should always be valuable, it is in working with those with adverse credit that brokers really show their worth, with the expertise of which lender is accepting of different types of adverse credit providing real value to the client. More instances of adverse are expected in the coming months. While there will be a lag before the increase in the overall cost of living bites, inevitably it will cause some defaults. This will again be brokers’ time to shine. With those who don’t have a spotless financial record, brokers can really demonstrate their value to the client by securing them the ideal product.

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Increasingly colourful BTL Mark Posniak managing director, Octane Capital

ere at Octane Capital, we have a good gauge of adverse credit in the buy-to-let (BTL) space, because we don’t just focus on bog-standard clients. We look after those who sit slightly outside the mainstream high street. We look for those with a story. This market has clearly seen a shift toward cases with more colour. Landlords have faced the perfect storm, with tax changes as well as the pressure on rental income, on the jobs market, and on the economy, and now interest rates are rising. It might be because they’ve got a slight credit blip, or a historical issue – often something that is not their own doing. For example, a tenant might be unable to pay the gas or electricity bills, which are still registered to the landlord. The other thing that we’re seeing more and more of is the confusion around taking a payment holiday versus just not paying. In some instances, there might have been a breakdown in communication between

the borrower and lender, and all of a sudden their credit file doesn’t show a holiday – it shows missed payments. The emergence of more of these stories was inevitable on the back of COVID-19 and Brexit, and all the pressures placed on those coming out of furlough, having not been paid their full salaries. Tenants have been under pressure, and borrowers have been under pressure, and something’s got to give. GETTING TO THE DETAILS You have to get underneath the bonnet of transactions to get a feel for what is adverse credit, what is a blip, and what is a payment holiday. It’s far more complex than it ever used to be. We are fortunate in that we don’t use credit scoring. We look at a borrower’s full credit profile, so we can dissect their credit report. There has definitely been an increase in the number of people with a bit more colour on their credit file, but that doesn’t mean that they are bad credit risks; it just means that you have to work a little bit harder to understand the story and to put them with the right product. Brokers are key to this journey, and specialist advisers and brokers are particularly

take a month or more to show up, now positive steps can start to take effect almost instantaneously, helping people take control and get closer to homeownership in the long run. OPEN AND HONEST There is little doubt that this market is growing. However, the fact remains that these borrowers are fundamentally higher risk, and there must be a balance between providing a route to homeownership and lending responsibly. Harvey says the first point of defence here are the brokers themselves. “These are higher-risk cases and require skilled advice. The most important thing, first and foremost, is that we are here to provide advice and we genuinely have to make sure we do the right thing for the customer. “This means we will advise a customer if we don’t think it’s right to proceed with their application. We have a responsibility, and a duty of care.” Whether looking at a one-off blip due to circumstances out of clients’ control, or a longer-term issue in need of support, brokers must focus on getting the full story. This means encouraging their clients to be honest.

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crucial as we move forward, but it’s also crucial that lenders be a little bit more perceptive, and a little bit more open to understanding what the situation is with each borrower. At Octane capital we have spent quite a bit of money on our front-end application process, but that is focused on gaining efficiencies and getting things in front of an underwriter more quickly; it’s not a replacement for an adviser. Our business is built on an old-school underwriting ethos, in which every deal, every asset, and every exit is looked at individually. We build a picture of the entire loan. We can get to the creation of that picture more quickly using technology – but in our world, we don’t allow a computer to make our credit decisions. When you have the human touch, where the broker can speak directly to the underwriter, there are no barriers. When there’s a little bit of colour to a case, the broker should be able to pick up the phone and have a conversation. If we can’t get comfortable with it, then at least they know they’ve spoken to the decisionmaker and they can move on, knowing where they stand.

Pemberton says, “The worst thing you can do as a customer is not be honest and not tell the full facts. If they tell you the full facts, you can always get information to back it up, and there are products out there that can help.” Coss warns that many people facing adverse credit can feel like a “second-class citizens, when they’re not.” To this end, he adds, brokers and lenders must be willing to listen and understand the full story, helping clients discuss what at times might be a difficult topic, either because of the taboo of disclosing financial issues, or the fraught circumstances that might have led up to them. One thing that might help with this transition to a more open and honest approach is a shift in perception of this market. This starts with the key terms, with many market commentators suggesting that the term ‘adverse credit’ should be scrapped in favour of something with fewer negative connotations. This is fast becoming the new normal, and should no longer be seen as either niche or taboo. In the current market, those with specialist expertise have a key role to play in seeing beyond the credit report, to the human behind it. www.mortgageintroducer.com

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SPOTLIGHT

PEPPER MONEY

Adverse credit? Ask a specialist Jessica Bird and Paul Adams discuss the ramifications of COVID-19 on borrowers with adverse credit, and how brokers and lenders can work together to provide the right support Pepper Money produces a regular Adverse Credit Study, in order to track trends and understand the needs of a demographic that is only going to grow in size and complexity. Most recently, the data has found that more than six million adults in the UK will have some form of adverse credit from the past three years, while twothirds of them are planning to purchase a property in the coming 12 months. Nearly 70 per cent think that the ramifications of COVID-19 will make it harder for them to do so. This is not necessarily true, says Paul Adams, sales director at Pepper Money. “We know that there are great options from specialist lenders like Pepper Money, and that the route to those options is via brokers. So it’s important that we shine a light on this issue, and on the power of professional advice.” THE PICTURE FOR BORROWERS Since the onset of the pandemic, 31 per cent of those with adverse credit have seen their personal income decrease, compared with 20 per cent of the overall adult population. Meanwhile, Adams says, “The rising cost of living has been well documented, with energy prices, fuel costs, and the price of food all increasing rapidly.” The majority (81 per cent) of those with adverse credit feel that a £100 increase in monthly bills could significantly affect their finances, while 32 per cent have already increased their outstanding debt compared to 12 moths ago. It is not an encouraging picture for those facing money troubles or with historical credit issues. Nevertheless, this specialist market is well equipped to help these borrowers cope, with both the lasting

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Paul Adams

SPOTLIGHT

PEPPER MONEY

“We provide a great service. Not just in terms of quick turnaround times, but also having a named case manager, being quick to answer the phone and responsive to queries – as well as excellent BDM support. Specialist lending is a broad offering to meet a wide range of customer circumstances, such as selfemployment and contractual work. Some of our mortgages have similar credit criteria to the high street, but we don’t credit score and we take an individual approach to underwriting every customer” ramifications of COVID-19 and whatever the next challenge might be. ALL ABOUT RELATIONSHIPS Just as Pepper Money aims to build a strong foundation of relationships with brokers, Adams says brokers should understand the importance of communication and support in order to help their clients. “Be proactive and let them know that there are options out there for customers with their circumstances,” he explains. “Brokers can help customers improve their financial position by ensuring they are on the right deal and also exploring options like debt consolidation to reduce monthly outgoings.” Adams also recommends building or growing an online presence, as 44 per cent of customers with adverse credit say they would ideally like to find a broker online. This relationship goes beyond getting in front of the customer, though. Credit issues and debt are a considerable burden, and can be a difficult – even taboo – subject to discuss. To ensure that clients are able to be open and honest about their financial situations and get the best support possible, brokers must also be empathic. Adams says, “Be supportive – nearly half of people with adverse credit say their current financial position is negatively impacting their mental health.” On the other side of the coin, brokers need to build up trust and relationships with the right lenders. Adams explains, “Work with lenders that understand this market, underwrite each case on an individual basis and give you named case handlers. “Make the most of your BDMs – ask them questions and discuss cases. And don’t put up with second-rate www.mortgageintroducer.com

service – specialist lenders can also provide marketleading service standards.” EXPERT ASSESSMENTS Over the years, Pepper Money has worked to grow its own adverse credit proposition to fit with the evolving needs of this demographic. Where originally the lender chose not to cater for those with a Debt Management Plan, it then introduced a separate range with higher rates. “We could see that these were customers who were making a concerted effort to get their finances back on track, and were a better credit risk than first assumed, so we have brought the ability to lend to people in Debt Management Plans into our core range,” Adams adds. “We also have a range of Bankruptcy and IVA products and products for customers who just fall out of high street criteria, so we cover the whole spectrum.” Diverse products that fit the needs of this demographic require expert understanding of this market. This is the foundation for underwriting at Pepper Money, Adams says. “We have always taken an accepting and responsible approach to lending to customers with adverse credit, based on expert underwriters making an individual assessment of every case. “We also provide a great service. Not just in terms of quick turnaround times, but also in having a named case manager, being quick to answer the phone and responsive to queries – as well as excellent BDM support.” He adds, “Specialist lending is a broad offering to meet a wide range of customer circumstances, such as self-employment and contractual work. “Some of our mortgages have similar credit criteria to the high street, but we don’t credit score and we take an individual approach to underwriting every customer.” LOOKING TO THE FUTURE The specialist adverse credit lending market is on the rise, and Pepper Money stands at the forefront of its progression and growth. For 2022 and beyond, Adams says the lender has big plans: “We will continue to champion financial inclusion and broaden our proposition to reach a wider audience. “This includes the expansion of our Affordable Home Ownership proposition, which currently includes Help to Buy and Shared Ownership. “And, of course, we launched second charge lending under the Pepper brand earlier this year and we will continue to explore ways to grow and develop this proposition.” As an increasing number of clients and potential borrowers start to find themselves falling outside of the mainstream market’s algorithms, brokers would do well to consider whether the future is specialist. APRIL 2022 ADVERSE CREDIT

For Intermediaries Only

Have an impaired credit case sitting on your desk? Our flexible approach to lending and manual underwriting could help! Get in touch with us today to find out more. Visit www.bucksbs.co.uk/intermediaries to find out more.

Buckinghamshire Building Society is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registration Number 206022.

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Non-standard histories rise with uncertainty Claire Askham Charles McDowell key account manager, managing director – North and Midlands, specialist mortgages, Buckinghamshire HTB Building Society

s we emerge from the pandemic, consumers have been hard hit with rising costs of living, increased energy prices, and inflation currently at five per cent – a 20-year high. There are fears that this could increase further when the energy price cap rises. In addition, the Bank of England (BoE) base rate is set to continue to rise. These factors will inevitably have an impact on people’s affordability credentials, perhaps especially for those who are self-employed or have a complex borrowing history. When it comes to the housing market, 2021 saw an increase of over 10 per cent in house prices – the biggest since 2006 – driven by a combination of low interest rates, a desire for more space for home working, and demand outstripping supply. It has never been more important to support people on their journey to owning their own homes, yet lenders need to account for potential future changes outside of a borrower’s control. After a relatively long period of low interest rates, increasing interest rates will likely affect borrowers as they come to the end of fixed-term deals. What’s more, a report from TML suggests that 14 per cent of all UK adults plan to buy a home this year, but 34 per cent could experience application problems due to poor credit histories brought on by the pandemic. As the market evolves, lenders must consider affordability and applications case by case, taking a more flexible approach. This bespoke, specialist www.mortgageintroducer.com

approach will see lenders better positioned to reach a positive outcome for the likely increase in complex cases, especially given the challenging economic circumstances many people have faced during the pandemic. Intermediaries have seen a shift toward greater use of affordability calculators, now often mandatory. These are used to explore in detail what an applicant can afford. However, manual underwriting and applying credit searches, not scores, is particularly relevant after the unexpected events of the past few years. Another change is the trend toward remortgage products that allow people to consolidate their existing debts and raise capital for home improvements, providing a financial lifeline to many who otherwise would not be in a position to have one. ONUS ON LENDERS TO MAKE RESPONSIBLE OFFERS

The market has seen a 5.8 per cent increase in missed or late mortgage payments since January 2021; the mortgage industry thus has to ensure that it lends responsibly. It is the responsibility of lenders and underwriters to consider individual customers’ financial situations closely. It is important to limit the chances of people hitting a credit blip through borrowing more than they can reasonably afford. Aside from the challenges facing the economy, a range of personal factors can lead to a credit blip, including relationship breakdown, poor mental health, or job loss. Where that credit blip has already happened, lenders should work with customers – through brokers, when relevant – to revaluate their affordability and get them back on track and set up for long-term success.

An underwriter can work with a broker to support applicants in assessing what their current or new financial situation is and ensuring that they do not take unnecessary financial risk outside of their true affordability status, and, indeed, can advise on what steps need to be taken in order to improve credit searches. SPECIALIST LENDERS ARE THE EXPERTS

Specialist lenders can often provide solutions that meet the requirements of people who have adverse or nonstandard credit. To ensure that an application is successful, it is recommended that applicants have a clear understanding of their actual financial situation and be able to explain what steps they have taken to improve their credit status. This could include reducing outgoings or setting up a payment plan for unsecured debt. Brokers can support their clients by working through potential questions or concerns before submitting an application. ABOUT BUCKINGHAMSHIRE BUILDING SOCIETY

Buckinghamshire Building Society is dedicated to being a responsible, flexible lender. Its manual approach to underwriting, robust affordability calculators, and wide range of products to suit all needs ensure it can help people on their journey to owning their own homes. Buckinghamshire Building Society is constantly evolving its product portfolio and has recently launched a remortgage product, as well as a firsttime buyer product. Coming soon is an all-new holiday lets offering – a new area for the society that it expects will be popular, with 55 per cent of UK holiday goers preferring to stay in the UK even with travel restrictions lifted. By understanding and responding to changing market conditions, Buckinghamshire Building Society is well positioned to offer solutions for each individual client’s needs. APRIL 2022 ADVERSE CREDIT

Adverse Credit? We’re the experts.

Adverse over 12 months old can be ignored IVAs & DMPs accepted Plans with unlimited amount of CCJs and defaults Plans with up to 6 months’ secured arrears Lenders that will accept unlimited payday loans Lenders who don’t credit score www.nortonbrokerservices.co.uk | 01709 321 665 The mortgage or loan must be a�ordable now and for the term of the loan. This information is for credit intermediaries only and should not be distributed to potential borrowers.

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ers.

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Specialist lending in the mainstream Charles McDowell David Binney managing director – specialist mortgages, commercial manager, HTB Home Loans Norton

s the world begins to emerge from the fallout of the pandemic, the number of people finding themselves affected by adverse credit is likely to have grown. The past two years have proven to be financially challenging for many people, with missed payments on credit cards, phone bills, and utility bills more commonplace as the economic challenges brought about by the pandemic took hold.

“The mortgage market landscape is changing, and a growing number of borrowers are increasingly finding themselves falling foul of the strict lending criteria used by many mainstream lenders” According to research conducted by consumer watchdog Which?, missed payment rates on housing costs, bills, loans, and credit cards increased for the second month in a row in October 2021, up from 5.7 per cent to 7.3 per cent from the previous year – accounting for almost five million people in the UK. The increase was one of the highest seen since the beginning of the pandemic, and occurred before further hikes in the base rate, rising inflation, and the war in Ukraine squeezed household incomes even further. This trend is likely to continue into 2022, as the long-term effects of COVID-related job insecurity, rising energy bills, and increases in www.mortgageintroducer.com

National Insurance contributions pile further pressure on affordability. The Resolution Foundation forecasts that an average drop of £1,000 in household income is expected this year, the biggest fall in real-term income since the mid-1970s. With this as a backdrop, the number of people struggling to make ends meet and defaulting on payments will likely continue to grow. UNDERSTANDING THE FACTS

For those brokers with clients emerging from the pandemic with an adverse credit rating, whether a one-off blip or a more serious County Court Judgement (CCJ), it is vital they understand and explore all the options available when it comes to accessing a mortgage. One commonly held misconception among consumers is that having defaults or a CCJ on a credit report means applying for a mortgage is off limits; this is not always the case. In fact, there are a growing number of specialist lenders who are more than willing to consider applicants with a blip on their credit record and provide a solution for their borrowing needs. In fact, even those with more serious and long-term adverse credit ratings such as secured loan arrears and bankruptcy, can be catered for, as many specialist mortgage lenders take a view of the bigger picture by assessing each case on its own merits and tailoring solutions for those borrowers who do not fit the strict mainstream criteria of high street lenders. This is particularly important for any existing borrowers who may have concerns about debt or payment defaults accrued over the course of the pandemic. With many mainstream lenders, securing another mortgage with an impaired credit record may be impossible, leaving existing borrowers mortgage prisoners, unable to switch

to a better deal and at a heightened risk of eventually losing their home if they cannot afford to keep up with repayments. STRAIGHT TO THE SPECIALISTS

Seeking the help of a specialist lender in this situation could enable borrowers to switch to a better deal that is more affordable, as well as potentially remortgage to consolidate any debt and work toward repairing their credit record. The same is true for first-time buyers who may feel the financial ramifications of the pandemic have only served to put them at an even greater disadvantage and prevent them from ever getting a foot on the property ladder, particularly as many high street lenders have started to claw back cheaper mortgage offerings. By sourcing a mortgage through the specialist market, brokers can ensure these borrowers get access to more tailored underwriting that is specific to their individual needs. This could be the difference between securing a mortgage for clients or seeing them fall short of the one-size-fits-all criteria of the mainstream mortgage market. The fact is, the mortgage market landscape is changing, and a growing number of borrowers are increasingly finding themselves falling foul of the strict lending criteria used by many mainstream lenders. Even before the pandemic took hold, the number of people with adverse credit profiles or irregular incomes, or purchasing unusual properties, was on the rise. As the financial challenges presented by the pandemic continue to play out, this formerly niche sector looks set to become more mainstream as high street banks continue to narrow their lending criteria. This presents a clear opportunity for brokers to tap into this ever-growing market and offer specialist lending advice to clients who may have seen their credit profiles affected by COVID-19. With further economic instability ahead, the specialist lending sector is perfectly positioned to help those with adverse credit profiles achieve their homeownership goals. APRIL 2021

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More than their score We Are a Complex Credit Mortgage Lender

Our key features: No credit scoring Criteria on completion Ignore all CCJ’s & Defaults under £300, including all telecommunications Up to 4 defaults & 3 CCJ’s allowed in the last 3 years per applicant Up to 2 missed payments per unsecured credit in the last 6 months

T: 0800 368 1833 W: bluestone.co.uk/mortgages/adviser Lines open 9.00am - 5.30pm Monday to Friday. Calls may be recorded. Bluestone Mortgages Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 2305213 at 3rd Floor, 22 Chancery Lane, London, WC2A 1LS

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Adapting to a complex credit landscape Charles McDowell Mark Todd managing director – specialist mortgages, key account manager, HTB Bluestone Mortgages

ccording to new research from Bluestone Mortgages, those traditionally underserved by the mortgage market have a number of money worries in 2022. Their top financial concerns include: the rising cost of everyday items (67 per cent); the lack of stability of finances (35 per cent); rising interest rates (33 per cent); being unable to work (30 per cent); and the rising cost of rent (29 per cent). The results are unsurprising, given the Office for National Statistics (ONS) Consumer Prices Index rose by 4.8 per cent in the 12 months to December 2021. A third (34 per cent) of people who have traditionally struggled to secure a mortgage predict that their financial situation will remain the same this

year, while 18 per cent believe they will be worse off. Only two-fifths (40 per cent) predict they will be better off financially this year. Those without a credit score are more likely to be in a worse financial situation (30 per cent), compared to those who are selfemployed (17 per cent). A RISING TREND

It goes without saying that over the past two years, the mortgage market has gone through a challenging time. Not only has the impact of the pandemic changed the way we work – with working from home becoming the norm and businesses having to shift from a centralised workforce to remote set ups – but the profile of customers who are underserved by mainstream lenders is also changing. Many people are likely to find themselves in a more complex financial situation than they were previously. Credit scores are set to take a hit, which may affect people’s ability to secure a mortgage with high street banks. Furthermore, with an increase in people whose incomes have dropped, including agency workers such as healthcare professionals and CIS and self-employed individuals, homeownership dreams have moved even farther away from reality for many. As a result, many borrowers could find themselves turned away, offered few to no other options. This represents a huge opportunity for brokers, who are going to be approached by more customers looking for help. Specialist lenders have a vital role to play and are a viable alternative for those with a history of poor or complex credit. SPECIALIST SOLUTIONS

Credt scores have taken a hit for many

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or have complex income streams. Bluestone Mortgages has always had a reputation for helping when no one else has been able to, whether because applicants have non-traditional income methods or recent adverse credit. The pandemic gave us an opportunity to look at our customer base and expand upon our traditional profile. The tightened criteria from other lenders during the early part of 2020 was a chance for us to showcase how flexible and necessary a complex credit lender like us was, to help a range of potential customers who have found themselves disenfranchised from more traditional lending routes.

Specialist lenders take a more holistic approach and take into consideration those borrowers with credit blips, as well as those who are self-employed

ALWAYS EVOLVING

Nearly two years later, we are still demonstrating our ability to adapt where possible, and we have enhanced our proposition significantly to make ourselves a more attractive option for mortgage brokers in seeking to help with the ever-changing needs of potential borrowers. Over the past six months, we have enhanced their proposition significantly to serve more mortgage brokers across the UK. The improvements we made to our self-employed criteria to allow customers to choose to use their most recent year’s trading figures or the previous year’s – if they were affected by COVID-19 and can demonstrate through bank statements that they are back trading at pre-pandemic levels – have proven to be very popular with brokers. Moreover, we now assist CIS workers by accepting 12 months’ vouchers or payslips, and foster carers with a two-year track record. Our entry into the Right to Buy market has offered another solution and shows our commitment to disenfranchised customers. We have also looked at the way we operate from a processing perspective, particularly regarding our documentation requests, which our key intermediaries have raised with us. We are living in an evolving world, and our approach to lending continues to evolve positively along with it– so we can help give credit where credit is due. APRIL 2022 ADVERSE CREDIT

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One swallow does not a summer make Charles McDowell Buster Tolfree managing director – specialistofmortgages, director mortgages, HTB Trust Bank United

hat’s wrong with the term ‘adverse credit’? Well, for those old enough to remember the heady days pre-Credit Crunch, and now-defunct lenders like IGroup, RFC, Rooftop, and Ocwen, I’ll say it just seems to conjure up images for me of sitting on the Private Label new business desk in 1998. LIBOR was at 4.60 per cent, and I was, more often than not, looking at a price matrix from one of those types of lenders, adding on a five per cent loading for unlimited adverse, and another one per cent if you wanted self-cert thrown in for fun! That isn’t really the market we are talking about today. Every Tom, Dick, and Harriet has had a go at naming this sector, from ‘credit repair’ to ‘credit impaired’, with a stop-over at ‘nearprime’, and everything in-between. So what we are really talking about here is a sector that exists within the specialist mortgage market, for those who’ve had some payment wobbles but are now financially stable. I’m sure every mortgage broker in the UK has seen such cases, either when they get a new client, or, more likely, contact an existing one toward the end of their fixed rates to arrange a new deal, only to find something has happened between their last fact-find two years ago and this one. People divorce, get ill, lose or change jobs, lose a relative, etcetera. You may have heard of it? It’s called life. One or more of these challenges will happen to all of us at some point – it’s just that some of us are better prepared or have a bigger rainy day fund to see us through. www.mortgageintroducer.com

Having spent some time thinking about it, I believe that the real diﬀerence is that back in 1998, lenders were paying out mortgages to those who were sometimes still having a payment wobble, the cause of which might be nowhere near resolved. Imagine being made redundant back then, and still being able to remortgage via a self-cert or non-status product, even if you didn’t know where your next meal, utility bill direct debit, or mortgage repayment was coming from. FAST-FORWARD

Aside from many still not necessarily knowing where their next energy bill payment is coming from, after seeing gas and electricity prices rocket in the last few months, the mortgage world is now a diﬀerent place entirely. I’m sure there are very few brokers who haven’t placed a case with a Precise or a Kensington or a Pepper or – hopefully! – a UTB in the past two

years. It’s the norm, right? Not all customers fit a cookie cutter; if they did, the high street would gobble them all up. That’s why we specialist lenders exist. To one degree or another we all look beyond the façade to understand each application more deeply. The world is a more complex place these days, in more respects than just adverse on a credit profile. We have the gig economy, a growing selfemployed contingent, and those with earnings from multiple sources. Even the pandemic – who saw that coming? There was no historical experience to rely on when it came to furlough and payment deferrals. Who would have thought to understand how society, borrowers, and lenders would react to being told to stay at home for the better part of two years? Or how quickly all that would become tomorrow’s chip-paper in the face of the terrible conflict in Ukraine? Borrower circumstances are often far more layered than is evident solely through the lens of ‘adverse credit’. Things happen in life. It is our duty – responsibility, even – as the specialist lending community to understand the specific issues. We can then make informed and commonsense decisions. We won’t all have the same appetite to lend. But you can bet your bottom dollar that usually, if a customer has had an issue we can understand, that issue has been resolved, and they can aﬀord the loan they want, a good broker will find a way to redemption. FINAL THOUGHTS

Historical bad debt shouldn’t close the door forever

Life doesn’t always go to plan. Sometimes it’s our own fault, sometimes we’re just dealt a bad hand, but we shouldn’t assume that further fails are guaranteed. Aristotle pointed out that “One swallow does not a summer make”, and when it comes to helping people buy or improve their homes or otherwise improve their finances, we’re ‘Team Ari’ all the way. One defaulted credit card in your twenties does not a future bankrupt make, and it shouldn’t leave you out in the cold forever. APRIL 2022

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Holding the keys Jessica Bird outlines the discussion at the latest Mortgage Introducer round table, which asked whether this market is ready to cope with the new normal

s the world gets to grips with the financial ramifications of COVID-19, and the challenges yet to come, the adverse credit market is only going to grow in strength and importance. Mortgage Introducer asked experts from Pepper Money, Norton Home Finance, Buckinghamshire Building Society, Haysto, Bluestone Mortgages, The Loans Engine (TLE), Norton Home Loans, and United Trust Bank (UTB) to weigh in on whether this growing demographic of borrowers is properly catered for, and what the market looks like as it emerges into the ‘new normal’. A GROWING DEMOGRAPHIC According to Paul Adams, sales director at Pepper Money, the group of people suffering with poor or adverse credit is growing bigger. “There are definitely more customers who fall into this bracket, whether you call it adverse credit, credit impairment, or credit blips,” he explains. “That’s a result of many things. Life events might have caused people to miss payments, or just overlook some of their finances for a period of time, which can push customers into this category.” The events of the past two years, which have placed a strain on many individuals, are only exacerbating the problem.

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Adams continues, “Many customers have had to adjust or have had a reduction in their income. “From our own studies, we know that there are probably more than six million people in the UK who fall into the category of having adverse credit over the past three years. “But we also know that a good proportion of that group is looking to purchase a property in the next 12 months, either to either to live in or to rent out. So that’s over a million customers.” John Pemberton, senior sales and business development manager at Norton Home Loans, says, “During the pandemic people will have fallen onto hard times because of the obvious reasons, and people are borrowing money to get themselves out of their current issues. They might have a missed payment, and some banks are not sympathetic to that at all.” Buster Tolfree, director of mortgages at UTB, says that this demographic has far from stopped growing, adding, “It definitely hasn’t peaked. If you think about what we’ve gone through the last two and a bit years, and then coming out of the back of that we’ve still got rising house prices and a cost of living hike, travel costs going through the roof, the utility bill crisis. “It’s a situation that most people, certainly most under 40 or even 45, have probably never seen before. A lot of people’s bills are doubling, and when you put that sort of pressure on the average member of the www.mortgageintroducer.com

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ADVERSE CREDIT public, that puts stress in other areas. “It might not necessarily be on mortgage arrears, although I’d expect that to come at some point, but certainly there’s unsecured credit stress, and that’s what creates the blips, quirks, or periods of adverse credit that we’re talking about today.” He explains that while for most, the goal is to rehabilitate out of an adverse credit situation, this demographic will likely grow faster than it shrinks for the next few years at least. For these reasons, the specialist market catering for non-vanilla and adverse credit cases is set to continue growing over the next three to four years, according to Tolfree. In January 2022, Citizens Advice found that more people were seeking one-to-one support from the charity than at any other time during the pandemic – up to 270,000 people, up from the 265,000 peak in November 2021. Claire Askham, head of mortgage sales at Buckinghamshire Building Society, says, “Unfortunately it’s an area that’s going to continue to grow. It’s just showing the need for advice when it comes to these customers, to try to help get them back in the right position.” NO ROOM AT THE INN? For many consumers, there is an assumption that adverse credit means being turned away at the door. Indeed, this could well be the case when it comes to the major high street lenders, which tend to take less of a case-by-case approach. This has led, in the past, to the issue of brokers turning away customers with credit issues; however, Adams notes that as this customer demographic has grown and evolved, so has the market that serves it. “Mortgage brokers are bringing these customers into their business and are able to help, because the lender options out there are vast,” he adds. Due to the complex nature of this market, Adams continues, Pepper Money in particular has focused on simplifying and streamlining its product range, as well as integrating with third-party systems such as Knowledge Bank. He says, “This means that there are places brokers can go, over and above our own sales teams and BDMs, to get advice or guidance on ‘the art of the possible’.”

“My recommendation to any broker would be, really get to know who your specialist BDMs are that you want to work with, and build a relationship based on trust” PAUL ADAMS www.mortgageintroducer.com

“There are telltale signs when you ask certain questions, when the customer is worried about something. Brokers have got to try and get the customers to be a little bit more honest” JOHN PEMBERTON Looking to the future, Adams suggests that an increasing number of brokers are looking to diversify into this specialist market, as they can see the promising trajectory it is on. Satnam Sidhu, mortgage specialist at Haysto, agrees and adds that, from the broker perspective, this is a “very exciting period.” He continues, “Unfortunately, when we went through the pandemic, a lot of clients had to sit back because specialist lenders – as they always would do from an investor perspective – would back off the market. Loanto-values (LTVs) were altered, there were a lot of ‘No’ responses, or ‘Come back to me in six months’.” However, he explains that the offering is now starting to get back to a pre-pandemic norm in terms of criteria. There is still some way to go in terms of recovery, but “the conversations are becoming very much what they were pre-pandemic,” where the focus is more on what can be done to improve a borrower’s position, rather than an outright no, where possible. “These lenders that kind of had to sit back during the pandemic, which is understandable, are now raring to go,” Sidhu adds. “They want business, and so it’s very, very easy for me to place clients, which is always good, always exciting.” Askham agrees: “There is certainly a home for any case that you’re trying to place these days, because of the wide spec that we’ve got across different specialist lenders.” Tolfree adds that the picture has changed substantially since the Global Financial Crisis. Now, there is a clear focus on responsible lending and affordability, as well as there being simply a broader market, with more ability to deal with complex applications. In fact, the specialist market that has emerged in the years since is specifically able to cater for complex histories, property types, and deals in which adverse credit is simply one part of a wider picture. He says, “Because the specialist market’s become so involved, and lenders understand the risk parameters of what they’re writing a lot better today than they did maybe 10 or 15 years ago, those customers who were previously out of the market – not just because of adverse credit but because of another layer of complexity – actually, there’s a home for them. One that just didn’t exist before.” → APRIL 2022 ADVERSE CREDIT

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“It’s important for brokers to really understand that story behind the customer, and then look for that lender that can help” CLAIRE ASKHAM

Chris Holcomb, new build and national account manager at Bluestone, agrees. “If you look at where the market’s gone, and the number of lenders that sit in this space, it’s grown dramatically. I think that it’s been a reaction to the way household finances are going up.” Nevertheless, despite all of these advancements and the broadening market, Matt Harvey, complex finance specialist at TLE, warns that there are still those who turn away cases involving adverse credit. “They’re nervous about it,” he explains. “They are very conscious of it from a regulatory perspective, conscious of their responsibilities, particularly around debt consolidation.” AFFORDABILITY CHALLENGES Although lenders, when considering adverse credit cases, by and large do not differentiate between home movers and first-time buyers, the panel warns that the latter group are more likely to face affordability issues. Sidhu says, “There’s options available for people who have had credit problems or had difficulties, but there has to be a level of logic. If we’re giving, you know, quite high LTV mortgages, the risk is ultimately with the lender.” While a credit blip six months ago might not preclude a borrower from accessing a higher LTV deal, Sidhu notes that lenders still have to lend responsibly, and have a “duty of care” not to place borrowers on deals they might struggle to pay back based on their financial history. He continues, “First-time buyers who are renting – they are the ones that I feel sorry for the most, because with rising costs, [and] wages getting squeezed in terms of inflation, where are they meant to save money? “They’re probably the ones where brokers might be turning around saying, ‘Go and ask your parents, your grandparents, and get another £10,000’, but money doesn’t grow on trees.”

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Tolfree adds, “People need help to get on the housing ladder, and that’s why we’ve still got more demand than supply. “We’ve had 10 different Housing Ministers in 10 years, none of whom has delivered on their pledge, so we know that housing supply isn’t high enough, and that what that does is force up values. “Now, as lenders, that’s probably a good thing, because when you lend you can fast-forward a year and that house will be worth more. But it is forcing out first-time buyers. The goalposts are moving farther and farther away for that cohort.” Rent payments are, in many instances higher than prospective mortgage payments, so the market generally failing to take these into consideration is another issue that faces first-time buyers when it comes to affordability. UNDERSTANDING THE MARKET One of the key reasons that brokers are finding it possible to place cases, as people’s financial histories become increasingly complex, is due to the methods employed by the lenders in this specialist market. Askham says, “For us as a building society, we have the opportunity to be able to look at these cases on an individual basis.” In order to do this, however, it means understanding, education, and transparency on the part of all the players in a deal. This includes ensuring honesty and openness from the client, which is not always the easiest task. “The key is the advisor understanding what the situation is with that client. Was it a life event? What happened for these blips to occur? How have they been able to react to that? Have they been able to maintain their credit moving forward? “They need to understand the big picture, so that then they can help the lender understand why this is a case that we should look at doing, and what we can do to try and help that customer and put them back in a better position, and hopefully help them improve their credit score as well, which then will open up the market and give them more options moving forward in a couple of years.” To this end, Askham calls for greater education among customers to ensure they realise the help that is available to them. Adams agrees. “There’s a huge perception gap. I always hope that a broker never turns away an adverse credit customer – credit repair is something we’re all

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ADVERSE CREDIT aiming to do, to support somebody in homeownership, repair their credit, and then they’re back into the High Street. “But we just need to break that perception gap that still exists. In the surveys we do, it’s a constant that the majority of borrowers, as an example, think they have to wait five years after a County Court Judgement [CCJ] is registered before they can even apply for a mortgage, but we know that’s not true. There is always a solution.” Holcomb notes that education and communication are part of the foundations of this market, and its ability to cater for a growing number of customers. He explains, “As a whole, we are in a really strong place to support these types of borrowers, and part of that is because we’re out there talking and doing these sorts of events and webinars, etcetera. “There’s an educational piece that’s been happening over the past couple of years, which naturally from a broker perspective just helps them understand the market, who the players are, who the lenders are, who they should be going to in order to talk and build that confidence. “Whereas historically, for a lot of brokers, this would be seen as difficult, complex, and something to shy away from, now you’re seeing more brokers getting that case on the desk, picking up the phone and using the tools that are around – being that bit more confident to actually place a case.” Harvey says that lenders in this market are currently working hard to provide education and increase understanding. He continues, “The visibility and awareness are there for brokers and intermediaries, and bear in mind most of these lenders aren’t direct-to-consumer – most of the business is via intermediaries. “I do think mortgage brokers can do more to preempt these conversations with customers and explain things to them.” For those who have yet to build up this confidence, Holcomb encourages them to get in contact with specialist distributors and lenders, or to find a brokerage that “will marry up when it comes to ethos and culture” in order to refer those clients. He adds, “Instead of just shying away and saying, ‘Sorry, I can’t help’, you’re actually still able to refer that business on to someone who will have that confidence, and aligns their business models, who can then help you build up that base understanding and knowledge over time.”

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Harvey adds that hesitancy among mainstream brokers can be a benefit for the specialist market, due to these referral relationships. “Specialist brokers are key,” he continues. “The important thing is to make sure we educate and support mortgage intermediaries, to make them comfortable, whether it’s going direct or referring. Either way, it’s making them comfortable enough to proactively have that conversation with the client.” This conversation is only going to become more important as purses are squeezed ever tighter in the

“Lenders that kind of had to sit back during the pandemic are now raring to go. They want business, and so it’s very, very easy to place clients, which is always exciting” SATNAM SIDHU years to come, Harvey adds. “Even just asking the client, ‘Are you OK?’ knowing that there are a lot of people who are going to be financially stretched over the coming weeks, months, and years, is actually an important piece of it as well.” FINANCIAL EDUCATION While conversations among brokers and their clients are an important piece of the puzzle, the panel agrees that this process needs to start much earlier in order for more people to understand the concept of credit and the options available to them. Tolfree says, “I think it starts in schools, but it’s not non-existent. For the last few years I’ve done some mentoring with 16- and 17-year-olds, and one of the things that they ask is around budgeting. They’re often looking at going into work, and no one ever taught them about how to budget, and then we wonder why people run up credit card debt in their late teens and early 20s.” Askham agrees. “Without a doubt I think it starts right at a very young age. It’s so easy for young people to be able to obtain credit. But I think it’s down to everybody within the industry to try to provide the education, because consumers don’t realise what →

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“Whereas historically, for a lot of brokers, this would be seen as difficult, complex ... now you’re seeing more brokers being that bit more confident to actually place a case” CHRIS HOLCOMB options are out there for them.” Once the population is older and approaching the prospect of borrowing for a home purchase, the issue arises of where they are getting their information from, warns Sidhu. While a lot of work is being put into communication between the lenders and the brokers, and the brokers and their customers, he notes that often people get information from the wrong sources, such as estate agents, ex-brokers, or even builders. “Trying to overcome that barrier comes back purely to incorrect awareness of the market, which the government has to take accountability for,” Sidhu explains. For example, with the government’s Help to Buy scheme, there are many misconceptions about who is – or, more importantly, is not – eligible. Sidhu points to clients assuming they cannot access the scheme because they have CCJs. “Awareness has to come from the top, initially – government to consumer,” he adds. Harvey says that part of the problem is the modern consumer environment, which offers options such as ‘buy now, pay later’, while lacking the support and clarity around what this might mean for customers’ credit ratings. “There’s more support that needs to be given out there,” he says. “As mortgage brokers, we have the opportunity to do that as well. I think the lenders support that incredibly well, we just have to be brave enough to have those conversations early on with customers and to try to find a solution.” Pemberton agrees, adding that many borrowers simply do not realise they are at risk of falling into adverse credit, and still think they fit within the mainstream, prime market, and thereby fail to look at the solutions that actually fit their needs. There is also something to be said, Tolfree adds, for

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simplifying and clarifying within the market itself. At the moment, there are some potential sticking points and taboos that are not going to dissipate without hard work from multiple parties. He adds, “We dance around the language a little bit – is it sub-prime? Is it adverse? No consumer wants to say ‘I’m sub-prime’. That’s a label that people don’t like.” This is akin to the movement taking place in the later-life lending market at the moment, which is seeing a shift away from using ‘equity release’ as a blanket term for the entire market. Instead, ‘later life’ helps move away from outdated negative preconceptions of equity release, while denoting the broad spread of solutions offered by this market beyond this one product. Tolfree continues, “Opening up that education piece is important – roadshows and broker engagement, for example – but I think it’s not just about how we tell brokers, it’s how brokers place it with the customer, even down to what you call the product.” Sidhu agrees, noting that brokers need to understand the correct, regulated terminology to be used with others in the market, while also being able to communicate these concepts to consumers “in plain English,” in order to provide a fair playing field where customers know their options. On the subject of regulation, he adds that there need to be stricter controls on which parties can comment on a borrower’s credit status and ability to find a mortgage. Sidhu explains, “Despite being in the industry for a long time, I cannot get my head around how solicitors are regulated, mortgage brokers are regulated, intermediaries are regulated – yet an estate agent is not and can say anything. It creates false pressure that puts consumers into more stress.” GETTING INTO THE DETAILS When it comes to placing a case in this specialist market, it is all about understanding what each lender requires from an application, and the individual nuances of each client. There is no one-size-fits-all, and often, according to Holcomb, the best thing to do is simply to pick up the phone to the lender and talk through the matter. He adds that, while the technology-driven solutions that are out there are ideal for narrowing down an initial enquiry to those lenders with criteria that fit, there is little substitute for a proper conversation. Adams adds, “That’s the beautiful thing about manual underwriting, and being a bit more of a ‘grey’

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ADVERSE CREDIT lender rather than black-and-white – you can have that conversation. “My recommendation to any broker would be, really get to know who your specialist BDMs are that you want to work with, and build a relationship based on trust.” This ability to talk through the details of a case also helps tease out some of the nuances of the adverse credit market. For example, a system might flag someone as having adverse credit, which, under an algorithm, could stop them from accessing finance, but which, upon closer – human – scrutiny, is only a small blip. “Each case is tricky, with its own complexities,” says Askham. “It might just be that there’s a missed payment, it might be that they are new to their employment or self-employed, or there might be affordability issues, which is something that we’re certainly seeing at the moment as everything starts to rise. “It’s important for brokers to really understand that story behind the customer, and then look for that lender that can help. Just understand the lenders that are out there, and what they can do to help, and build those relationships. “Lenders want to help you to do the business, we want to be able to place those cases, we just need to know the full stories.” UTB’s own research, Tolfree adds, has found that brokers feel the most important element of a lender’s proposition is not technology or commission rates, but the BDM, further reinforcing the importance of these relationships. Sidhu notes that these relationships are important even if the deal is not placed with that lender – that a well-reasoned ‘No’ could lay the foundation for more business down the line. Tolfree agrees, adding that the best BDMs will be able to point brokers in the direction of lenders better able to cater for their client, improving the market overall as a result. This ongoing relationship can help ensure cases are packaged in the best way, without drip-feeding information and backed up by a fully fleshed out idea of clients and how they fit within the lender’s requirements. Holcomb points out that while there will be some instances in which the broker can’t provide a certain piece of information requested by the lender, due to the flexible nature of this market – and human underwriting in general – it might be possible to work

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out an alternative. Most importantly, he says, “if you’re not sure, pick up the phone.” Adams confirms that for Pepper Money, every deal starts with a conversation between the broker and underwriter. He says, “There’s a phone call to set it all out and make sure we understand what they are trying to do, fill in any gaps, and then arrive at an understanding of what is going to be required between now and the point we can send the mortgage offer out. “It takes a bit of time to do that, but what we’ve found is that it has helped us to reduce our time-to-offer significantly. It cuts out the bits where, for example, you ask for X and they can only provide Y. “Often brokers just have to upload an application and hope for the best, whereas a conversation up front can help them to understand whether it’s going to be sufficient or not.”

“Sometimes as an adviser you have to take a step back and look at the situation and say, it might be possible, but is it the right thing to do” MATTHEW HARVEY

This is what separates the mainstream from the specialist market, he adds. “Not being in the high street and having those high volumes coming at us every day is a benefit, but it’s only a benefit if you actually then, you know, work manually and have a dialogue with brokers.” STRESS AND TABOO This issue of stress is an important one, especially when it is being fuelled by potentially misleading information. From school-age onwards, if people were given more financial education and the tools to budget and protect themselves, not only might financial stress and instances of poor or adverse credit decrease in the first instance, but more would be able to understand – and access – the solutions available to them when issues do arise. “In the world that we live in, mental illness is such →

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ROUND TABLE

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“Those customers who were previously out of the market … there’s a home for them. One that just didn’t exist before” BUSTER TOLFREE

a big imperative,” Sidhu continues. “Mortgages are stressful in themselves – it’s the biggest financial transaction any human being will do.” However, there are still hurdles to be overcome, one of which is a general reluctance to discuss these matters. Borrowers are often reticent, either through shame if they feel their financial judgement might come into question, or through fear that opening up fully about their financial circumstances and history might preclude them from accessing a mortgage. It should also be noted that some of these instances of poor credit and missed payments might stem from a difficult life event, such as a divorce, which might make them even more difficult to speak about. Of course, what they likely then discover is that these issues come up anyway, just later down the line, with less opportunity for the broker and lender to fully prepare. Askham says, “It’s about trying to get the customer to be open and honest when they’re having those conversations with you. Some customers will think that they don’t necessarily need to tell you the full story, because they don’t think it’s relevant or they think the lender is not going to find out. Obviously, that’s when it can cause further issues later down the line. “It’s important to make sure that you know the customer feels that they can share, and they understand why they need to be honest and give all that information, so the lender can make the right decision.” Pemberton says that while the taboo is dissipating to an extent, brokers taking a nuanced and emotionally intelligent approach are an important piece of this puzzle, adding, “This should be addressed at the annual review meeting with the clients as it will identify clients with issues Brokers have to align themselves with finding out what the issue is. “There are telltale signs when you ask certain questions, when you can tell the customer is worried about something.” He continues, “Brokers have got to try and get the customers to be a little bit more honest, because that saves time. If you try and pin this down later in the process, that can create more problems. “My advice to brokers would be, ask them very simple questions, like ‘Are there any reasons why you would

ADVERSE CREDIT APRIL 2022

have problems getting financed?’ or ‘Did you have any forbearance or a holiday period for any loans during the pandemic?’ Talk to them and don’t be scared to ask the question.” Holcomb notes that some of this reluctance to discuss credit issues could also stem from the experience of having been rejected in the past. For those borrowers who go to a specialist broker after being turned away from the high street, the fear of a further ‘No’ might be what makes them cover things up. He adds, “If the education is out there and the public knows that actually being open and upfront is the best policy, it will speed that process. It will also reduce a lot of the stress and angst that they go through, because there are lenders like us that are willing to look at their circumstances and understand that everyone goes through it from time to time.” OVERCOMING RESISTANCE The importance of overcoming clients’ potential resistance to discussing debt or credit issues is particularly important when considering the myriad options out there that they might miss out on. For example, though many might assume it to be a deal-breaker, Askham points out that there are “quite a lot of options out there” for clients with Debt Management Plans (DMPs). Sidhu agrees that, although this is an area brokers might be nervous about – and with good cause – with the right frank conversations and understanding of how and why the client reached this position, and what their future trajectory looks like, there are a lot of potential options. Sometimes, these conversations might kill a deal. This is a reality that brokers and clients simply have to face, and in fact the wider picture is that this is fundamentally a good thing. Harvey says, “If they’re in those circumstances, there’s a reason, and there’s a responsibility on us as mortgage advisers to make sure that this is right for the customer. They might want to buy a house, but there’s got to be some reality around whether it’s the right thing for them right now. “It might not be the perfect situation that they want, but we need to make sure that it’s something that is actually serviceable. “We consider their historical behaviours when we’re assessing an application, and we will turn cases down because the behaviours just say to us that it’s not the right decision for them. “Sometimes as an adviser you have to take a step back and look at the situation and say, it might be possible, but is it the right thing to do?” He concludes, “Lenders need to lend responsibly, of course, but we’re supposed to be the gatekeepers, first and foremost.” www.mortgageintroducer.com

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01/04/2022 10:28