Tim Hague is managing partner of Sagis
For most of the past year, 2021 was the great white hope on the horizon. A vaccine was forthcoming, lockdowns would be over and life would begin its journey back to something more normal.
Now it is here, a heavy dose of reality has hit. In spite of there being several vaccinations approved for use in the UK and the rollout already underway, lockdown and the social and economic consequences of it are going to be part of our lives for some time to come.
The Chancellor will be mindful of this, and the continuing need for billions more in taxpayer money to be pumped into emergency funding schemes to keep businesses and individuals afloat.
Whatever his plans are for the stamp duty holiday, furlough schemes and emergency business loans, lenders are going to have a very tough time over the coming year when it comes to assessing borrower affordability and lending responsibly.
Already we are seeing stories in the media highlighting that difficulty – the couple whose remortgage and further advance was declined because of a late mobile phone payment of £24, for example. This is just one of many true stories that demonstrate the risk that has to be managed here.
On the one hand, lenders have to be sure that they aren’t doling out debt to borrowers who cannot afford to repay it, or who face an uncertain income future because of the ongoing economic disruption caused by COVID-19.
Lenders doing any reasonable volume of business also need to be able to think carefully about the thresholds and credit scoring standards that can be applied to their book across the board. But this approach is why the above scenario occurs – it’s the ‘computer says no’ problem, even when anyone sensible would take one look and say yes.
This kind of rigidity in underwriting is at once a help and a hindrance; it ensures consistency, but lacks the ability to take a considered view, something that is nearly always a better approach when it comes to assessing a borrower, but in today’s market is absolutely critical.
There is a world of data out there, but how we choose to interpret it and the conclusions we draw are now of crucial importance.
There’s also the massive elephant in the room, which is whether the stamp duty holiday will be wound down in an orderly fashion.
If the Treasury adheres to the current plan of a cliff edge cut-off, it is going to cause massive headaches for borrowers whose transactions collapse, triggering other transactions in their chain to break. It’s also going to stir up a huge amount of distress and anger with mortgage lenders, which inevitably will have to withdraw offers if the affordability changes.
This is yet another risk that lenders will be forced to manage and consider when it comes to approving or declining applications.
Stories of buyers whose dream was set to become a reality having that dream torn to pieces by the ‘big bad bank’? It’s only a matter of time before these begin to emerge.
But there is one thing that all lenders will need to get a better grip on, and that’s product design. It is vital that this, and the processes needed to implement it, are fit for the market today and tomorrow.
This is not just about an individual’s ability to keep up with their mobile phone payments when they’re receiving their salary month in, month out, but how you assess their creditworthiness when they have been furloughed three times in the past 12 months, made redundant and rehired by their employer in the same company but a different position, have kept up with their payments on credit cards, but have had to take the odd month’s holiday to tide them through the periods when administrative delays have impacted their cashflow. Lenders’ propositions need to evolve.
A borrower who can manage the uncertainty and volatility of income seen by so many in the past year is probably a good credit prospect. However, basing a decision in principle on the traditional scorecard underwrite is going to kick many borrowers out before the lender has even had the chance to take a proper look.
Lenders will need to think through product policies, as those that might once have fallen into the prime mainstream category suddenly become sub-prime.
Experience shows that borrowers’ credit rehabilitation takes forever. Lenders need to rethink what prime looks like and carefully consider how they label their products.
The first step in being a responsible lender in 2021 is to recalibrate how we consider affordability post-pandemic.
We cannot rely on flogging the same old products to borrowers whose lives and finances have changed dramatically in a very short space of time.