Adverse Credit Boom Prompts Questions

Over the last year, there’s been a flurry of product launches, as lenders pile into this nascent market. Some of the new entrants in 2005 included the Bristol & West, Victoria Mortgages and Beacon Homeloans, while investment banks Deutsche Bank and Morgan Stanley are in the process of setting out their stalls. And the trend looks set to continue during 2006; with personal debt now topping the £1 trillion mark, it would seem that there’s room for the adverse market to grow and for more lenders to take advantage of the increased profit margins of this sector.

Many mortgage brokers have tales to tell about the bad old days of the adverse sector, when clients with impaired credit history had to pay through the nose to secure a mortgage. Today, this flourishing sector is now a competitive one, and with so many new entrants, there is potential for a price war. However, the old adage that increased competition is always a good thing for customers, because it brings prices down and improves services, may not apply in the adverse market.

Of major concern is the limited experience of some of these new lenders, in what is an incredibly complicated market. A recent investigation by the industry regulator, the Financial Services Authority (FSA - http://www.fsa.gov.uk), , revealed that in many cases, mortgage firms were giving inappropriate sales advice. In 80% of the files reviewed by the FSA, there was a lack of evidence to demonstrate how the recommended adverse product met the customer’s needs and circumstances. Further, more than 40% of firms had no intention of reviewing a client’s sub-prime mortgage product, to see whether that customer could transfer onto a prime mortgage contract at market leading rates at some point in the future.

Although the FSA’s conduct of business rules do not require such a review, Alistair Good, the managing director of the south London-based brokerage, MIAS (http://www.mias-ltd.co.uk ), believes that adverse credit mortgages should only ever be recommended as a stepping-stone to high street lenders and good credit. He said: "Establishing long-term affordability is therefore key; otherwise, a vicious circle can easily occur, whereby a customer grappling with high mortgage repayments falls into arrears – which in turn, locks them into further expensive adverse deals in the future."

Although some of the new products on offer are competitive, many target only certain types of customer. Some mainstream lenders can be said to be dipping their toes in the market, and going for clients with only small blips on their credit history – rather than heavily adverse clients with, for example, a number of CCJs. Thus it remains difficult for individuals with severe financial worries to find a suitable lender with reasonably priced products.

Now, more than any other time in the history of the adverse market, it appears that a good, impartial broker is indispensable, in order to get adverse clients the best deal, keep them informed about the latest sub-prime mortgage news and explain to them the pros and cons of complex products. Only in this way can the burgeoning adverse market benefit the growing number of people in the UK with credit problems.