Non-Standard Lending - UK - November 2007

Table of Contents

• Issues in the Market
• Historical context
• Scope of the report
• Key issues examined
• Market Definitions
• Abbreviations
• Market in Brief
• The ' non-standard' market comprises a broad range of borrower types
  • Figure 1: Lending risk categories and examples of non-standard mortgage products, 2007
• Shifting demographics and behaviours expand the market
• New companies have emerged to cater for these changing needs...
• ...but the recent credit crunch halts further product development
• Leading brands in the sector
• Non-standard business accounts for a third of total mortgage lending
• The wider mortgage market
• More difficult times ahead
• Regulatory pressures set to intensify
• Key consumer research findings: identifying the non-standard consumer
  • Figure 2: Proportion of adults who meet the main non-standard lending criteria, July 2007
• Applying for a mortgage
• Internal Market Environment
• Key Points
• US sub-prime meltdown...
• ...and financial market contagion...
• ...lead to consumer panic and crisis at Northern Rock
• Pulling down the shutters
• Rate shock
  • Figure 3: Bank rate and BBA LIBOR, March-September 2007
• Sub-prime and self-cert sectors come under the regulatory microscope
• FSA study into sub-prime results in five firms facing enforcement action
• Treating Customers Fairly
• Consumer Credit Act, 2006 will boost opportunities in secured loans market
• Keeping up with the changing needs of borrowers
• Pricing risk in a climate of rising indebtedness
• Debt is a way of life for around half the population
• The Easy-debt Society
• Companies starting to share customer information
• Debt judgements hit ten-year high
  • Figure 4: Consumer CCJs (excluding DVLA judgements) registered 2002-07*
• Implication
• Majority of people dislike being in debt
  • Figure 5: Agreement with selected financial lifestyle statements, 1993-2006
• The threat of escalating mortgage debt write-offs
  • Figure 6: Mortgage debt write-offs and arrears, 2002-07
• Home repossessions on the rise
  • Figure 7: Mortgage possession actions, 1990-07
• Implication
• Individual insolvencies spiral upwards
  • Figure 8: Individual bankruptcies and IVAs in England and Wales (not seasonally adjusted) 1998-2007
• Tackling over-indebtedness
• The growth in debt consolidation
• Broader Market Environment
• Key Points
• Clouds loom over the UK economy
  • Figure 9: Total PDI, consumer expenditure and savings, 2003-12
• Implication
• Sharp drop in borrowing activity
  • Figure 10: Expected savings, investment and borrowing activity -- Q3/Q4 2002-Q3/Q4 2007
• Still bright employment picture
  • Figure 11: Workforce employed and self-employed -- UK, 2000-07
• Implications
• The debt mountain edges up higher
  • Figure 12: Consumer credit outstanding and secured borrowings 1997-2007
• Implications
• Average household debt over £53,000Figure 13: PDI, Total loans outstanding, Total debt/PDI, Average household debt and consumer debt write offs, 2002-07
• Are interest rates taking effect?
  • Figure 14: Consumer confidence and bank rates 1988-2007
• The role of LIBOR comes to the fore
• Mortgage rate rise
  • Figure 15: Mortgage rates, 2002-07
• Implications
• Signs of a slowdown
• HIP invasion
• Affordability
• The London effect
• House price growth set to moderate...
• ...but BTL may flourish
• Competitive Context
• Key Points
• Firm growth in mortgage demand
• Specialist lenders taking market share
  • Figure 16: Mortgage Approvals all lenders and specialist lenders, 2002-H1 2007
• Specialist lenders have a greater focus on house purchase
  • Figure 17: Mortgage Approvals all lenders and specialist lenders 2002-H1 2007
• Specialist lenders' share of the main mortgage sectors
  • Figure 18: Specialist lenders market share by mortgage type, 2002-7
• Outlook
• Growth rate of consumer credit slowing down
  • Figure 19: Consumer lending 12-month growth rates*, March 2002-June 2007
• Changing shape of non-standard specialists
• Strengths and Weaknesses in the Market
• Growing demand offset by tougher operating environment
  • Figure 20: Summary SWOT analysis of the non-standard market, 2007
• Unchartered waters beckon, unless interest rates fall suddenly
• Financial risks facilitate the need for consumer education
• Market Size and Forecast
• Key Points
• Sizing the non-standard population
  • Figure 21: Size of the non-standard population, 2007
• A sizeable minority relying on non-standard providers
  • Figure 22: Breakdown of use of mainstream and non-standard/specialist providers, July 2007
• The post-Northern Rock Environment
• Credit scoring
• Most have an unblemished record
  • Figure 23: Credit scoring in the British population, August 2007
• From squeaky clean to torpedoed prime
  • Figure 24: Credit risk groups, by demographic group, July 2007
• Forecasting the non-standard market
• The Stationary Demographic Scenario
  • Figure 25: Future changes in credit score groups based on demographic trends, 2007 & 2012
• Shifting definitions
• Gainers and losers -- The Squeeze Scenario
• Almost a million could be lost...
• ...but the gains could be greater
• This means a 2008 potential consumer base of 17.83 million
• Gainers and losers -- The Tight Squeeze Scenario
• The more restrictive -- the better it is for the non-standard sector
• A tighter squeeze better for number of potential customers
  • Figure 26: Forecast scenarios of non-standard potential consumer base, according to severity of credit squeeze, 2007 & 2012
• Segment Performance
• Key Points
• Roughly two in five mortgages are ' non-standard'
  • Figure 27: Estimated breakdown of the UK mortgage market -- number of outstanding prime versus non-standard mortgages, 2006 and 2007
• Gross mortgage lending picks up strongly in 2006
  • Figure 28: Gross mortgage advances, by type of loan, (not seasonally adjusted), 2001-07
• Total non-standard mortgage market worth £125 billion in 2007Figure 29: Gross non-standard mortgage lending, by type of loan, 2006-07
• Little impact of rising interest rate on BTL sector
• Affordable housing
• Shared-ownership schemes
• A niche sector set for further expansion
• Right-to-Buy
• Self-certification
• Self-cert and fast track mortgages a cause for concern?
• Full range of products
• Sub-prime -- US contagion set to spread to UK
  • Figure 30: Recent changes in sub-prime borrowing rates and criteria, 2007
• Mounting arrears and repossessions likely -- calls for greater regulation inevitable
• Market Share
• Key Points
• HBOS is the leader of the pack, by a wide margin
  • Figure 31: Lenders' share of UK mortage market, by gross advances, 2005-06
• Non-standard specialists grew their balances strongly in 2006
  • Figure 32: Lenders' share of UK mortage market, by balances outstanding, 2005-6
• Changes afoot?
• Companies and Products
• Key Points
• Some 30 lenders operate in the non-standard mortgage market
  • Figure 33: Summary of the main providers of non-standard mortgages in the UK, August 2007
• Recent entrants
• The largest non-standard lenders
• Birmingham Midshires
• GMAC-RFC
• GE Money Home Lending
• Kensington Mortgages
• Mortgage Express
• Other significant players
• Debt consolidation companies prosper
• Leading suppliers
• Brand Communication and Promotion
• Key Points
• Non-standard mortgage brands will mean little to consumers
• Poor financial promotion in sub-prime sector
• Most non-standard specialists target their advertising at IFAs and brokers rather than consumers
• Specialist mortgages account for just 1% of total mortgage adspend
  • Figure 34: Mortgage adspend, by product sub-category, May 2007
• The largest specialist mortgage advertisers have budgets around £0.5 million
  • Figure 35: Leading specialist mortgage advertisers, years to May 2006 and May 2007
  • Figure 36: Mortgage adspend, by outlet type, year, May 2007
• Implication
• More advertising for secured than unsecured personal loans
  • Figure 37: Personal loan adspend, by type, 2002-07
• Implication
• Picture Financial -- largest-ever financial start up growing its presence in secured loans market
  • Figure 38: Leading advertisers in the secured personal loans sector, years to May 2006 and May 2007
• Channels to Market
• Key Points
• Most non-standard business is generated via intermediaries...
• ... referrals come mainly from IFAs, mortgage brokers, packagers, and mortgage clubs
• Packagers provide a supporting role to brokers and lenders
• Online developments at heart of distribution
• Online revolution
• The Consumer -- Credit Ownership and Usage
• Key Points
• Credit cards and mortgages most-widely-held credit products
  • Figure 39: Ownership of selected financial products, July 2007
• 25-45-year-olds biggest users of credit; 55-64-year-olds taken most to plastic cards
  • Figure 40: Ownership of selected financial products, by gender, age, socio-economic group, marital status and lifestage, July 2007
• Family lifestage key to the mortgage market
  • Figure 41: Ownership of selected financial products, by socio-economic group, work status, income, housing tenure, and region, July 2007
• MPPI -- giving non-standard lenders a degree of safety?
  • Figure 42: Ownership of selected financial products, by technology and media preferences, July 2007
• The importance of cross-selling
  • Figure 43: Sources of credit used, July 2007
• Four-fifths of borrowers use mainstream lenders
  • Figure 44: Breakdown of use of mainstream and non-standard/specialist providers, July 2007
• Young people, DEs, and families more likely to use non-standard lenders
  • Figure 45: Breakdown of use of mainstream and non-standard providers, by gender, age, social class, and lifestage, July 2007
• People likely to be struggling financially are more likely to use non-standard lenders
  • Figure 46: Breakdown of use of mainstream and non-standard providers, Household income, working status, tenure, and marital status, July 2007
• Scotland has the highest proportion of consumer credit borrowers
  • Figure 47: Breakdown of use of mainstream and non-standard providers, TV Region and ACORN analysis, July 2007
• All ' new' media users most likely to borrow
  • Figure 48: Breakdown of use of mainstream and non-standard providers, by Technology and Media preferences, July 2007
• Implications and opportunities
• Car and home improvements top credit usage
  • Figure 49: Reasons for borrowing money, July 2007
• Mainstream lenders used most for car purchase, non-standard lenders most for essential household items
  • Figure 50: Reasons for borrowing money, mainstream and non-standard providers, July 2007
• Implications and opportunities
• The Consumer -- Credit Risk Factors
• Key Points
• A large proportion of the population falls outside prime lending criteria
  • Figure 51: Credit risk factors, July 2007
• Older age groups have higher credit risk
  • Figure 52: Credit risk factors, by age, July 2007
• Similar incidence of impaired credit factors amongst C1, C2 and Ds
  • Figure 53: Credit risk factors, by gender and socio-economic group, July 2007
• More credit impairment in lower income bands
  • Figure 54: Credit risk factors, by income, July 2007
• Higher incidence of credit impairment in Scotland
  • Figure 55: Credit risk factors, by region, July 2007
• Implications and opportunities
• Some 4.3 million people may struggle to get a mainstream mortgage
  • Figure 56: Ability to obtain new mortgage/remortgage, July 2007
• Lack of income a major constraint for first-time buyers and singles
  • Figure 57: Ability to obtain new mortgage/remortgage, by gender, age, socio-economic group and marital status, July 2007
• ABC1s more confident of mainstream mortgage availability
  • Figure 58: Ability to obtain new mortgage/remortgage, by lifestage, special group, working status and household income, July 2007
• Three-quarters of current mortgage borrowers expect to get a mortgage/remortgage from a mainstream lender
  • Figure 59: Ability to obtain new mortgage/remortgage, by household tenure and region, July 2007
• Implications and opportunities