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Over 5% of total mortgage lending in 2005 was probably made up of "adverse
credit" lending to consumers with previous credit problems, according to
research published by the Council of Mortgage Lenders (CML).
The trend means adverse credit lending is now largest specialist sector after
buy-to-let mortgages.
Defining the size and scope of the adverse credit mortgage market is complex
because there are no standard definitions in use across the industry.
But the CML has chosen to echo the FSA's definition of an adverse credit
history.
On this basis, which excludes the relatively new "near prime" lending now being
undertaken by some lenders, the CML has used data from its regulated mortgage
survey to find that:
► Nearly half of adverse credit lending is to people in the less serious "low
adverse" category, and less than a quarter is "high adverse".
► Four fifths of adverse credit mortgages are sold through intermediaries,
compared to less than 60% of non-adverse.
► Two thirds of adverse credit mortgages are remortgages, compared to about half
of non-adverse loans. And remortgagors with adverse credit histories are
unsurprisingly more likely to borrow more than their previous mortgage to
consolidate other debts than their non-adverse counterparts.
► Compared with non-adverse borrowers, borrowers with an adverse credit history
are a little older, more likely to be self-employed, and more likely to have
mortgage debt payments that are a relatively high percentage of their income.
► Although arrears and possessions are higher in the adverse sector than in the
prime market, for many borrowers adverse credit lending represents a way of
rehabilitating their finances after a period of financial difficulty.
Independent research showed that 30% of non-conforming borrowers thought their
credit standing had improved since taking out their mortgage, compared with 8%
who felt it had got worse, suggesting that a material degree of credit
rehabilitation does occur.
► Adverse underwriting systems are more likely than prime lending to include
credit scoring models, but a higher proportion of adverse credit loan
applications will be subject to manual underwriting.
The borrower's income and
behavioural indicators, as well as past credit history, will be important
factors in determining how much to lend.
► Loan-to-value ratios on adverse lending are often higher than for non-adverse
loans, so providing little support for the view sometimes expressed that lenders
rely on un-mortgaged equity to mitigate credit risk.
Typical income multiples
are broadly similar to non-adverse loans, but the distribution is different and
a greater proportion of adverse credit borrowers have mortgage debt payments
that are a relatively high percentage of income.
The author of the study, CML head of research Bob Pannell, explained: "We
believe that the adverse credit mortgage market, although higher risk, plays a
valuable part in helping many individuals who encounter short-term financial
difficulties to rehabilitate their finances and migrate back to prime products.
"There are many flavours of adverse credit mortgages to deal with the broad
range of circumstances that people face.
"It is a real testament to the dynamic and innovative nature of our market that
UK lenders are able to offer an attractive range of mortgages to suit these
different circumstances."
Source:
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