Recovery starting at the wrong end?

One definition of insanity is doing the same thing again and again but expecting a different result every time. Financial services providers sometimes look as if they have gone insane, especially if the current return of sub-prime mortgages is anything to go by.

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In the last few months, at least three lenders have released new loans through intermediaries that are all designed for borrowers who have been turned down by the main banks. Like those high street lenders, they use the same information – credit record, deliquency, affordability – but come to a different conclusion. By pricing in risk, they hope to avoid the same unsustainable lending that brought the world’s entire financial system crashing down.

The question is whether this is the right decision. Borrowers will certainly find it more expensive than before – despite a record low bank rate, interest rates even on tracker loans are high. That will price some of the riskier customers out of the market. And it is surely right that some consumers who are being ignored by the main lenders, like the self-employed, should have access to funds.

What financial marketers ought to be asking themselves is why so many consumers who fall in the middle ground – not delinquent, but certainly stretched – are still unable to get a mortgage. Everybody knows that economic recovery will not begin until the housing market starts to move, yet approval rates are still at an all time low.

It may be time to completely rebuild the models and look at a different set of data on which to base lending decisions. Top of the agenda should be a fundamental review of whether credit reference agencies are doing their job, or if the information they provide is being mis-used in some way.

It was ratings agencies who helped the financial pyramid to be built (and then topple) through labelling almost every package of debt as triple A. Competition for fees meant either the detail was not looked at or a blind eye was turned. So loans were made that were unaffordable and then repackaged and resold in ways that were indefensible.

Knowing how much an individual has borrowed and how well they service those loans is important information. But it is just raw data – it does not make the decision for itself. That is where marketers need to engage with risk departments to discuss why products are not being brought to market.

There are plenty of middle-income families that want to move, are in employment, but may have notched up some black marks on their credit record. Rather than look at the bottom end of the market, it is these consumers that lenders should be targeting.

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