Weathering the storm

Grant Bather

November 3, 2007

The credit crunch is gradually moving out of the headlines as Northern Rock gets back on its feet and the markets begin to recover.

But the industry won’t be quick to forget, and the short-term future for the UK’s non-conforming secured loan market is uncertain.

All in all, it’s not a good time for non-conforming. We have lost some lenders, and those that are left have pulled back their maximum loan-to-values (LTVs) and increased their rates.

On 6 September, Lehman Brothers announced it would be pulling out of the second charge market, closing down Southern Pacific Personal Loans and the recently subsumed London Personal Loans. Victoria Mortgages called in the administrators a few days later as its funding lines dried up.

Other lenders have capped their LTV – Advantage and Money Partners at 75 per cent, a reduction from 90 per cent, and iGroup to 85 per cent, which also used to lend up to 90 per cent.

So we have lost some non-conforming products, criteria have been tightened across the board and we have lost some lenders altogether. The frustration is that there is nothing fundamentally wrong with UK non-conforming lending.

The key difference between the US and UK markets is that the Americans threw the lending rulebook out of the window. There have been rumours of ludicrous income multiples – up to eight times income in some cases – and while the UK has been innovative, we have never taken such major risks, thanks to the sensible approach of our lenders.

On the flip side, none of the prime lenders have been affected, and there have been very few changes other than normal Base Rate fluctuations. All non-conforming secured loans seem to have been tarred with the same brush, and it is causing serious funding problems for a significant proportion of lenders.


The main issue seems to be the stigma that is now attached to the very word ‘non-conforming’. It strikes fear into the hearts of funders, and lenders can no longer get the money to offer loans as normal, despite the fact that they have an exemplary record when it comes to their arrears profiles.

Secured loans occupy a niche in the marketplace and they can still be hugely profitable, but the people with the cash are too big to realise this – they see ‘non-conforming’ and run a mile.

This means that when the lenders go to investors to look for the money to fund their lending, they find that the doors have been closed to them. As a result, they have to tighten their criteria or look elsewhere for help, as with Northern Rock. The fact that the non-conforming sector has experienced comparatively little damage only rubs salt into the wound – it’s a less stable market, but its reputation hasn’t been dented by the credit crunch.

Loss of profit

The news that UBS and Citigroup have suffered significant loss of profit following investment in US non-conforming residential loans will do little to improve the funding situation for lenders. UBS announced pre-tax losses of just under $700 million, thanks to negative revenues of $3.4 billion in its fixed-income, rates and currencies division, which had invested heavily in collaterised debt obligations.

Meanwhile, Citigroup expects its Q3 post-tax profits to slump by 60 per cent, with $1.3 billion of losses incurred following investment in non-conforming mortgage-backed securities. These latest developments can only cause further panic among investors, leading to less funding for lenders who have done nothing wrong.

However, the damage shouldn’t be permanent, and funders should eventually realise that the UK non-conforming market is a relatively safe bet. US borrowers have been caught out by a series of interest rate rises, while Britain has been reasonably stable. US house prices are falling in contrast to the UK, where they continue to rise steadily despite the doom mongering. Most importantly, lending criteria tend to be much looser across the pond, so although the rewards are potentially greater, the risks are huge and have caught a lot of people out.

A strong positive message

The UK non-conforming secured loans sector needs to send out a strong message to the big investment lenders that the market is clean and their money will be safe. We have avoided offering astronomical multiples and maintained sensible lending policies. Lenders offering secured loans need to weather the storm – in six months, or possibly a little longer, the money should be back on the market and we can get back to business as normal.

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