Both Self-cert and Sub-prime are significant sectors
and it is anticipated both will continue to perform strongly.
Gross lending in this particular sector is predicted to
reach 26 billion GBP by the end of 2006. However both
Self-cert and Sub-prime are also under scrutiny by the
Financial Services Authority. There are currently about
4 million self-employed workers in the UK up from 3.2
million in 2000, according to the Office for National
Statistics, and an increasing number of people who rely
on bonuses, commission or second incomes in addition to
their basic pay. UK working patterns are changing and
multiple income sources are increasingly common. Datamonitor
estimate some 6 million people are in employment types
suited for Self-cert and forecasts 4.7% growth per annum
to 2009.
Customers can be divided into three categories which
helps determine the circumstances when self certification
may well be the right option. Self-employed applicants
who may not be in possession of an adequate history of
audited accounts and/or taking much of their income as
dividends. Contractors who may be on their first contract
with no history of renewal, or may be contracting in an
industry/profession outside of their previous experience
and employed applicants may rely on bonuses or commission;
have investment income, including buy-to-let properties;
and they may have other income sources, such as maintenance
payments.
However, it is true to say that self-certification has
had a turbulent and checkered history, with industry commentators
questioning whether there was a genuine need for the product.
The trough came in 2003, when the BBC's Money Programme
aired on the 28th October 2003 made allegations of mis-selling
of self-certification mortgages. The press had a field
day with headlines such as "Birmingham suspends staff
after BBC probe" from the Daily Telegraph, "Mortgage
Code Compliance Board to launch self-cert inquiry","Regulator
to investigate allegations of false salary claims"
commented the Financial Adviser, while The Times proclaimed
"Self-certification gets a bad name". Money
Marketing further added "Banks drop employed self-cert".
The programmes primary claim was that borrowers, with
the encouragement of brokers and lenders. were making
exaggerated and inflated claims about their incomes in
order to get their application approved and processed.
It also alleged that lenders did not carry out sufficient
underwriting checks to ensure that the appropriate lending
decisions were being made.
The Financial Services Authority conducted an investigation
into the market. One lender highlighted in the programme
took disciplinary action against its mortgage consultants
featured in the show and stopped selling self certification
mortgages in its branch network. Several other lenders
changed product offerings, while others left the market
altogether.
The Financial Services Authority followed up its investigation
in November 2005 with a mystery shopping exercise. Although
it was generally satisfied with its findings and largely
cleared the industry of any systematic wrong-doing, it
still found that about 5 per cent of intermediaries visited
were prepared to inflate the applicant's income. As a
result, the Financial Services Authority continues to
view self-certification as a high-risk product area, though
this now has more to do with encouraging all parties involved
to remain vigilant than any specific failings in the industry
or the products it provides. This was backed up by the
Council of Mortgage Lenders response to the Financial
Services Authorities report: "Self-cert continues
to provide a useful option for borrowers who do not fit
conventional mortgage criteria".
The Self-Cert story, to date, should be seen as a cautionary
tale to both brokers and lenders. If lenders and compliance
regimes are consistent then the opportunity for fabrication
of figures will disappear. Perennial concerns for brokers
and self-certification lenders is how much information
they should be requesting, appropriate questions must
be asked and inconsistencies questioned. Returning to
an intermediary for actual proof of income is clearly
inappropriate and in cases where the lender becomes uncomfortable
with the non-verified income, the case should be rejected.
Care should also be taken with Fast-track and beware of
automatic cascading while also exercising a degree of
selectiveness.
However all this within an industry that seems at odds
with itself and one of extremes. From the self cert and
sub prime market to the majority of lenders somewhat Dickensian
approach of still applying a 3.25 income multiple rather
than an industry standard affordability model.
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