Regulator is wrong to blame non-banks
Posted on November 2nd 2009
The recent Mortgage Market Review singles out non-banks or high-risk lenders, as they are referred to, as the source of the expansion of loans with multiple high-risk characteristics.
Exact has analysed and re-underwritten over £4bn of non-conforming loans over the last 18 months and I agree with the Financial Services Authority on risk layering being a systemic cause of arrears.
I also agree that the next generation of non-bank lenders will require sustainable business, funding and capital models.
But I disagree that non-banks drove the growth in this type of lending. Risk layering was prevalent across the industry and since the early 2000s deposit-taking lenders have dominated this sector.
Exhibit 3.2 on page 33 of the FSA’s paper takes a simplistic view of the non-conforming market, looking at the number of lenders rather than the volume originated.
This view shows that of the 20 lenders in the sector with arrears rates of over 5%, one was a building society/bank, seven were subsidiaries of banks or societies and 13 were non-bank lenders.
But looked at on a volume basis it can be seen that most of these types of products were originated by deposit-taking firms.
At the peak of the market only a handful of non-bank lenders even made it into the top 30 lenders.
With the economy desperately needing liquidity, I hope that the FSA can give assurances that a witch-hunt will not prevail.
