The non-conforming maze

As the fallout from the sub-prime crisis in the US is prompting many banks and non-bank lenders to tighten their lending criteria, we consider the challenges facing those brokers who have chosen to specialise in the non-conforming segment

Freedom Loans director Mark Roberts said he decided to specialise in the non-conforming segment because it offered greater job satisfaction and more challenges.

"It is very rewarding to hear that our customers are back on the straight and narrow after some difficulties in their lives and are genuinely grateful that they found a company that knew how to assist their situation when they needed help the most," Roberts tells AB.

His experience is not unique. According to a recent survey by Pepper Homeloans, the main reason brokers enjoyed working with non-conforming clients is the opportunities it gives them to help people get back on their feet and realise their dreams.

Roberts also notes that the complexity of the non-conforming segment compared to the mainstream loan market makes his work more varied and also more challenging.

"Every customer has vastly different needs and circumstances, and requires a premium service to assist their needs."

Because of this, non-conforming loan applications can often be more time consuming. "I would say there is two to three times as much work involved in writing a non-conforming loan," Roberts says, adding that the extra time involved means that despite the higher commissions earned by brokers in this sector the time/income equation tends to equal things out.

Tighter credit for riskier borrowers

Tighter credit markets, particularly for non-conforming lenders, have introduced an array of new challenges for specialist brokers in the field.

"Lenders are actually facing very real problems at the moment," Roberts explains, "with many being unable to sell-on their loans to potential buyers due to the losses that are being documented in the US sub-prime market.

"This inability to secure additional funding, or acquire funding at a premium price, has left many non-conforming lenders in a very precarious position.

"For [Freedom Loans], the knock-on effect has been that these lenders cannot afford to take on customers that are deemed too risky any longer, and must now only accept stronger applications so they can on-sell these loans and secure future funding in the uncertain credit market.

"This has led to us being able to help fewer customers than before."

Bluestone's executive general manager of sales and distribution, Michael Murphy, says he understands the situation many specialist brokers find themselves in.

"I guess for a non-conforming broker, he is probably wanting to make sure that whoever he has a relationship with, in terms of a non-conforming lender, that they are able to support his business and settle the loans within a reasonable time frame."

He says an important issue for many brokers would be identifying which lenders are able to provide them with the best service, a challenge which underlined the need for transparency between non-conforming lenders and the broking community.

Roberts says his main focus at the moment is attracting customers who meet the intricate criteria of non-conforming funders, a task made trickier due to the fact many lenders are now offering fewer non-conforming products.

"The lenders have realised that they cannot now sell-on the loans packaged from the 'riskier' products," he says. "This has most certainly reduced the opportunities available to credit-impaired customers."

Lenders' view

For non-conforming lenders like Pepper, the key to helping brokers through this difficult period is linked to the provision of easy-to-use products, aimed at encouraging them to embrace specialist lenders.

"Pepper have had a program over a number of years called Pepper Advantage, where we run broker seminars to share our knowledge and learning on how to develop leads, grow referrer channels, manage time more effectively and conduct local marketing to grow our partner broker businesses," Pepper's head of marketing and product Ed Thian tells AB.

Murphy also emphasises the importance of working with a broad range of brokers. However, he concedes the relationship Bluestone builds with those who specialise in the non-conforming segment is in some ways unique.

"There are specialist brokers in the specialist lending space and that covers the full spectrum of non-conforming lending, reverse mortgages and to a certain degree commercial; and, yes, the relationship we have with guys who work their business in that space is much more about how do we build and grow the business together.

"Having said that, we are all about educating across the broader broking community about the specialist mortgage space."

However, both Thian and Liberty Financial's general manager of mortgages James Boyle acknowledge the complexity of the non-conforming space inevitably means specialist brokers would have an advantage.

"... things are changing quickly in lending at the moment and the pace is amplified in the specialty market," Boyle says.

"So lately brokers who focus on this type of lending have been better placed to keep up with changes than some who only occasionally write specialty product."

Rising debts and new opportunities

According to Roberts, one of the upsides to rising levels of indebtedness is that more and more customers are finding themselves in the non-conforming sector.

"In a time of rising interest rates and excessive personal borrowing in the form of credit cards and personal loans, more and more people are overextending themselves and need the assistance of non-conforming funders to clean up their mess," he explained.

However, despite an increasing clientele, there are few mortgage brokers currently specialising in the field.

"The biggest benefit of being in the non-conforming space is that not many brokers want to do it and this leaves more business for the brokers that want to be in non-conforming," Roberts says.

However, according to Murphy the days of specialist brokers operating in a relatively uncrowded marketplace look numbered.

"I think increasingly the specialist space is going to become more important across the broader broking community in terms of brokers looking to diversify their income stream and develop other market opportunities outside of just prime lending," he tells AB.

"I actually see that there will be greater interest across the broader broking community for this type of lending."

This movement towards specialising is certainly something non-conforming lenders seem keen to encourage.

"There is an opportunity for all brokers to tap into the "sawdust to gold" factor that occurs with non-conforming lending," Thian notes.

"All brokers will have a portion of their deals that will be rejected by traditional lenders or that will be significantly limited by the restrictions of mortgage insurers or other lending requirements.

"Not all of those loans will be approved as non-conforming deals. However, a significant portion of those files can be set by non-conforming lenders like Pepper to the benefit of the borrower, broker and lender."

Advice to new players

Asked what advice he would give brokers considering specialising, Roberts cites the importance of using business development managers (BDMs) and underwriters to guide you through the loan submission process.

"The non-conforming market is a far more intricate maze of policies than traditional lending and you must be as diligent as possible when assessing a customer's needs before suggesting a loan solution for them," he says.

"If the solution is incorrect for the situation, the application process can become a nightmare for the customer."

"Undoubtedly some mistakes will be made in the early years but as long as each mistake is not repeated then a comprehensive knowledge is achievable in a reasonable amount of time."

He noted that a common complaint from a lot of less experienced brokers is that non-conforming funders make it too difficult to get an approval.

"What the brokers have to remember is these funders are dealing in a much riskier area of finance than the banks are, and have evolved over time to be able to assess applications to a level of diligence that will give the funder and the customer the best opportunity of having a good relationship during the mortgage term."

Thian concurs, urging brokers to "view non-conforming mortgages from a solutions lending perspective".

"It's all about helping borrowers who would not otherwise have the option to open the door to realise their dreams of home ownership, financial freedom or access to capital for business success."

In a non-conforming world

Some of the differences brokers can expect:
* Non-conforming loans likely to take up to three times longer to prepare
* Non-conforming loans usually include higher broker commissions
* Non-conforming loans usually more individually tailored
* Non-conforming applications usually more complex than mainstream ones