The nonconforming market is developing rapidly in the U.K. with an influx of new players joining the fray. Still, volumes are not near the size of the prime sector and industry sources say there is still plenty of room for growth. They are also predicting a steady rise in issuance in this product over the next two years.
The market has heated up lately with increased competition from new lenders entering the market and from existing lenders looking to expand. The new players include Investec, which has acquired loans from mortgage originators Unity Homeloans, Infinity Mortgages, Victoria Funding, Basinghall Finance and Rooftop Mortgages.
Major investment banks, which have traditionally played more of a background role via securitizations, are now joining in on the lending front. HypoVereinsbank, Deutsche Bank, Merrill Lynch, Credit Suisse and Morgan Stanley are among those institutions that have already initiated lending efforts and have announced plans to launch products by the end of this year. Other potential new players are UBS, Goldman Sachs and Wachovia, and the list goes on.
With the increased competition, industry sources say that the U.K. is looking crowded and new players wanting to set up shop need to offer competitive products and servicing. The rest of Europe is another story with no mortgage products in other jurisdictions specifically targeting the nonconforming sector, though buy-to-let, which is generally included under this category, is becoming more prevalent in Germany and France.
Unfriendly legislation is partly to blame for holding up the development of the nonconforming sector outside of the U.K. Under European usury laws, lenders are not allowed to charge rates that are higher than that of the country's central bank. The incentive to develop the market is not there because lenders can't price in the risks associated with this type of lending. Also in the U.K., lenders are allowed to foreclose on properties if problems arise with borrower payments. It's not the same in Italy and France, for example. In these countries, if a borrower has children or elderly living on the property, the lender is not allowed to take over the property and the court process takes more than five years. In other words, compared to the U.K., other jurisdictions are more borrower-friendly. The U.K. also offers competitive rates for these borrowers that are sometimes better than rates offered to prime customers in other parts of continental Europe.
"Growth in this segment of the market happened over a short period of time in the U.K. - there is a lot of potential for lenders to lend to people who can't borrow money from a traditional bank in Europe," one industry analyst said. "In the U.K., the buy-to-let market was created by changing legislation and the subprime market resulted from the harsh recession in the early 1990s."
However in the Netherlands, Spain and Portugal, where there is no usury law issue, a nonconforming market could develop, although no projects are in the works as of yet. But, although legal issues are not as much of a barrier, structural constraints do exist. "Developing a nonconforming market is the function of getting an available channel to get these mortgages to borrowers," the analyst said. "In Italy and Scandinavia, there has been some appetite for these products but for anybody to invest in these products there needs to be reassurances that volumes will grow and will get to borrows easily."
Despite some strides made towards developing a nonconforming market in Continental Europe, cultural factors still hinder borrowers from getting comfortable with these products. Much like the resistance towards raising volumes in credit card usage, most Europeans still put a stigma on debt and risk. And in some countries, ownership just isn't as much of an issue as it has been in the U.K.
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