Specialist and Sub-Prime Lenders

These lenders accommodate a range of mortgages that are not regarded as traditional or mainstream, or better known as ‘High Street’ lending.  Long established or small Building Societies for example may have not entered this market; many were not permitted to by the Financial Services Authority (FSA).

This market is known as ‘specialist lending’ and is associated with areas of lending including, self certification, buy to let and sub-prime. The sub-prime lending sector is well known for its downfall since 2007, which many believe started in the USA. This assumption is wrong!  The UK lending sector created its own problems.

Specialist Lending

This area of lending includes large loans, equity cash release, home reversion loans, shared ownership schemes, right to buy and many more.  It is more likely to be associated with self certification mortgages. Buy to let mortgages and commercial lending also falls into this sector.

Sub-prime lending background

In the mid 1990’s Kensington Mortgage Company (KMC), launched a range of sub-prime mortgage products, these were also known as adverse credit mortgages. This lending was targeted at consumers who had a poor credit reference held with a credit reference agency. This was also known as adverse credit lending. 

Mortgage applicants may have been declined by other lenders for having a County Court Judgement (CCJ) or arrears on other credit agreements e.g. personal loans, Hire Purchase, Credit Cards etc.  The criteria applied to such loans were initially very strict.  As new entrants came into the market such as Mortgages PLC and competition grew for a share of this sector, the criteria expanded and became more relaxed, more adverse credit history was permitted and loan to values increased i.e. the amount borrowed as a percentage of the value of the property.  Higher interest rates were applied; the returns (profits) to the lender were therefore increased. 

Mortgage Backed Securities (MBS) are somewhat complicated financial mechanisms which ensured that there was ongoing funding available to the lenders as loan books were securitised; this process is known as securitisation and gives lenders their profit from the loan book sale. 

The lack of confidence in financial services following what is referred to as the “credit crunch” for the securitisation of MBS created stagnation in lending as many lenders who did not want to hold loans on their own balance sheets, were compelled to do so.  Thus, lending ceased rapidly in the sub-prime sector during late 2007 and early 2008.

Sub-prime mortgages were made available to brokers who accessed mortgage packagers, these acted on behalf of the lenders who paid them a commission to carry out the administration of the loan application i.e. gathering personal financial details, obtaining a property valuation, including a credit reference report and supplying the lender with all information and documentation needed to produce a mortgage offer. The brokers were paid a procuration (introducer’s) fee after the completion of the mortgage loan. 

This fee started as a fixed fee of £250.00; however, this grew as more joined what was a rapidly expanding sector. 

Brokers could receive 1% (or more) of the loan size; many were also charging applicants’ fees for their services too.  It was not unusual for the rewards at completion to be thousands of pounds.  Arguably many applicants were placed on sub-prime rates to earn higher fees by some unscrupulous brokers.

This sector grew rapidly from 2000 to 2006. However, its demise is well recorded, starting in the summer of 2007 with the ‘credit crunch’. Lenders withdrew from the market or became insolvent and unable to lend. There are, however, signs of some lenders looking at a sensible approach to lending in this area again BUT it will never be allowed to grow as it did.