"Given the huge regulatory changes that have taken place since that time, to talk about ‘risky lending’ now is to talk about a level far removed from back then."
So, from the findings by Lendy – a peer-to-peer secured property lending platform – which looked at individual regions and attempted to extrapolate out what it deems to be the home of ‘risky mortgages’, we are presented with Croydon which apparently saw 463 such loans taken out during 2017, with London areas like Walthamstow, Wandsworth, Streatham and Tooting not so far behind.
Of course, the immediate reaction to this is what is being defined as a ‘risky mortgage’? And that answer, according to Lendy, is anything which meets the Bank of England’s definition of ‘high risk’ which is a residential loan lent at 4.5 times the applicant’s salary. A decidedly narrow view of ‘risk’ in our view and one that seems to ignore the last five years of affordability-based lending.
And secondly, certainly from our perspective, is how many of those mortgages might well be benefiting from private mortgage insurance which would undoubtedly mean any perceived ‘higher risk’ is being managed well by the lender and one would be unlikely to call these loans risky.
One of the key messages we preach as a private mortgage insurance provider is around the mitigation of risk for lenders using credit risk mitigants like private mortgage insurance. It’s about actively managing the risk of loans down, specifically in the high LTV space, but with the lender able to choose the tranche of LTV that they wish to secure that cover on.
In essence, the nature of risk will be different for each and every lender and clearly while there will be regulatory minimum standards to adhere to, the attitude to risk cannot be defined as uniform across hundreds of lenders. It’s for those reasons that I look at such research which defines a single area of the country as one where the most ‘risky loans’ taking place with deep scepticism.
The other point to make here is that lending is a moveable feast. Lenders appetite to lend, and appetite for risk, does change continually especially when it comes to the larger banks working predominantly in the residential/mainstream space. They will also have lending policies that ensure they are not lending in, what they will deem, riskier echelons within the same postcode.
Part of the reason why the Credit Crunch was so decimating for so many lenders is that there was no such restrictions placed upon lending. In other words, a number of lenders were more than happy to not just lend large amounts in the same postcode but they were lending on the same types of units within the same apartment blocks, and also doing this at very high LTVs – sometimes above 100% - to those that could not prove their incomes and/or prove the affordability of the mortgage. It is perhaps no wonder that, when the Crunch came calling, these lenders were left exposed at a level that nowadays would simply not be possible.
In that sense, and given the huge regulatory changes that have taken place since that time, to talk about ‘risky lending’ now is to talk about a level far removed from back then. Indeed, to – dare I say it – use the 4.5 income measure in order to determine the ‘riskiness’ of a loan is also rather simple, especially when you consider how the FSA and, subsequently, the FCA changes introduced in recent years have not focused on this ‘base’ measure, but instead ensure lenders use affordability measures in order to determine whether a borrower can afford the mortgage.
Risk is far more complex than this, and the suggestion that lenders are being overly risky in their lending does not appear to hold water, especially when there are a range of credit risk mitigant options available to them, such as private mortgage insurance.
What we need to do is ensure borrowers are aware of what lenders are truly looking for when it comes to making their lending decisions – and clearly advisers have a massive role to play here. Just because you might live in Croydon or those other areas, and you are looking to borrow 4.5 times income doesn’t mean you will be able to get a loan. Neither does it mean that you’ll be unable to secure a mortgage if you’re not quite within that range – there will be many areas to take into account on a lender’s part and consumers are not well served by a view which says that loan is incredibly risky and therefore a) lenders should not be offering it, and b) borrowers should not be accepting it.
We must try to present the whole picture rather than a particular, potentially irrelevant, snapshot otherwise we are in danger of putting off those potential homeowners/borrowers who may well be able to secure the mortgage they need.
