The FSA’s view on ‘non-banks’ is both over-simplistic and unhelpful, says Bob Young , managing director of Capital Home Loans
There is much to be commended in the FSA’s Mortgage Market Review (MMR), indeed there is a feeling that this offers the mortgage industry a chance to draw a line in the sand and hopefully work towards a, dare I say it, brighter future. This is not to say that we should take everything the FSA writes in the MMR hook, line and sinker while a number of the recommendations are a good starting point for a new mortgage ‘world order’, there are ‘truths’ which don’t seem to make any sense other than to emphasise entrenched and mistaken views.
Of particular concern in this regard is the FSA’s disturbing determination to place all lenders into either a ‘good’ or ‘bad’ camp. Firmly ensconced in the ‘good’ camp are the deposit-taking lenders, while the specialist or non-deposit lenders seem to have been sent further afield than Coventry and would appear, on reading the MMR, to be the cause of all the poor lending practices of the past few years. This is a very simplistic viewpoint for anyone, let alone the regulator to take and the ‘black and white’ nature of its analysis is a long way from the real story.
If anyone has not read the MMR and is not aware of the FSA’s take on recent events, then I can refer them to numerous sections of the Discussion Paper. Section 3.48, for example, reads: ‘The non-banks are of particular concern. Between 30% and 60% of borrowers on their mortgage books are in arrears.’
This is cause indeed for great concern if it was true of all non-bank lenders but it simply is not.
Does the regulator really believe that all non-banks fall into the 30-60% arrears camp? If it really does believe these figures then let me be the first to say this is clap trap, at least as far as Capital Home Loans is concerned, and I would warrant for a number of others – even those that took a less conservative view of lending than CHL. Our arrears peaked earlier this year (nowhere near even double figures let alone 30%) and have tracked down ever since.
The FSA says the arrears percentage figures it quotes are the result of data sent to it by all lenders, which is undoubtedly true, however it is really important that we are able to dig underneath these headline figures. This is easier said than done.
It is exhibit 3.2 in the MMR entitled: ‘Arrears rate and degree of lending risk in the UK residential mortgage market, by type of lender’ which reveals the 60% ‘headline arrears figure’ for non-bank lenders, compared with much lower numbers for both bank and building societies and their subsidiaries.
The problem is that these figures are not like-for-like for instance, they are not comparing one of the (deposit-taking ) banks’ sub-prime lending over a distinct period, say two years, with a non-banks’ equivalent products over the same period. The FSA says this type of comparison cannot be achieved because it does not receive data granulised in this manner – however if it wants a true comparison of banks as opposed to non-banks then it would and should have reviewed the numbers in this way. Not to do this gives a skewed view of the real picture – something of an understatement to say the least.
It would be foolish and wrong to suggest that non-bank lenders were blameless in all of this the market for these types of lenders did become particularly congested and because of that competitive pressure products were not priced correctly and delusional attitudes to risk and underwriting were commonplace.
Non-bank lenders did cause problems in the marketplace and will be running with significant number of accounts in arrears, but at the risk of sounding like a broken record, the largest lenders and biggest culprits in the specialist sector were the banks we are now supporting as a result of their poor business acumen. Not all non-bank lenders are the same and the FSA should not be using ‘catch-all’ terms within the MMR and elsewhere to suggest they are.
We should also not forget that it is the FSA itself who approve lenders the regulator had oversight of the business plans and in that sense it is also culpable for the issues that eventually surfaced. This is not a cheap shot at the FSA but stating that there has to be some acceptance that their own processes failed.
However, I do genuinely applaud the recent tough action of the FSA in the area of lender authorisation it has seemingly turned down a number of new lender applications in recent months. Potential new entrants are looking to take advantage of current market conditions by realising very high margins for very low LTV lending, taking the opportunity to ‘cherry pick’ its borrowers. It may be slamming the stable door after the horse has bolted but the regulators critical review will stop problems from emerging in the future.
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It is a theme I’ve covered before but we should really be separating out those lenders who only originated mortgage business to trade it on, and the, shall we say, ‘real lenders’ who originated with the full expectation they would responsibly manage their assets going forward – even if they were funded by securitisation. These latter lenders took full responsibility for their origination tactics, as they knew they would have to manage the consequences once that loan was on the books.
If lenders are going to be sectioned off into groups by the regulator, it seems fairer to make the comparison between good and poor lending as opposed to bank and non-bank. While it might suit the regulator to lay all the blame at the specialist/non-deposit taking fraternity, it must ultimately acknowledge that this is far from the truth. In the end, the industry will only learn from its mistakes if all those culpable accept their mistakes and are not ‘let off the hook’ by the FSA simply because they can be defined as a bank or building society.