UK Sub-prime Mortgages 2007 (Segment Report)

The sub-prime mortgage market has come a long way since its beginnings, emerging as a significant niche segment in the UK mortgage market. The sub-prime mortgage market continues its expansion with yet another good year in 2006. However, market dynamics are becoming more difficult and lenders need to monitor its ongoing challenges.



Report Highlights
The sub-prime mortgage market experienced another strong year of growth in 2006, expanding by 28 per cent in gross advances on the previous year's level. While the sub-prime mortgage population has fallen as a whole over the last five years, it has been growing since 2004, which has helped to boost the market. The near-prime sector is currently the fastest growing segment of the sub-prime mortgage market. In fact, whereas around five years ago the majority of the market was for medium and heavily credit impaired individuals, the market has now altered. Moreover, many lenders that cater to both segments have experienced a shift to lower risk volumes. As the market becomes increasingly saturated, lenders will need to look at new ways of staying competitive. Indeed, lenders will need to look to differentiation, and cost efficiency and funding will become crucial to overall success. Moreover, as the market becomes increasingly saturated, many lenders will look to expand into European markets.


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Overview 1
Catalyst 1
Summary 1
Executive Summary 2
The sub-prime mortgage market in 2006 and future outlook 2
The sub-prime mortgage market experienced yet another good year in 2006 2
Sub-prime mortgage individuals are at the least worthy end of the credit spectrum 2
The number of sub-prime mortgage individuals reached 4.2 million in 2006 3
The sub-prime mortgage market grew by 28 per cent in gross advances in 2006 4
A strong mortgage market and rising sub-prime population were key to the market's growth 6
Moreover, the future outlook of the market looks bright 6
In Datamonitor's opinion the sub-prime mortgage market will slow, but will grow faster than the mainstream mortgage market 6
Competitive dynamics of the sub-prime mortgage market 7
Increased competition has led to the emergence of a number of individual sub-markets 7
The near-prime segment has become the largest and most competitive sub-segment in the sub-prime mortgage market 8
The medium/heavy segment is smaller, and in turn, somewhat less competitive 9
In terms of gross advances share, the sub-prime mortgage market is still dominated by specialist players 9
GMAC-RFC, GE Money Home Lending and Kensington Mortgage Group lead the pack 9
Players must adopt new ways of competing in a more saturated market 10
Issues in the sub-prime mortgage market 10
By loosening their criteria, lenders are taking on more risk as household debt remains high 11
Such a situation could be unsafe given that lenders have been taking on more risk in the last few years 11
Events in the US sub-prime mortgage market hit many lenders by surprise 11
With high levels of indebtedness, the UK does merit some concern 11
The UK sub-prime mortgage market is likely to avoid a similar fate given its significant differences 11
Lenders should nonetheless take events in the US as a lesson learned 12
The sub-prime mortgage market is now under regulatory scrutiny 12
TABLE OF CONT 13
Table of figures 13
Table of tables 14
The UK sub-prime mortgage market in 2006 and future outlook 15
The UK sub-prime mortgage market experienced yet another good year in 2006 15
Sub-prime mortgage individuals are at the least worthy end of the credit spectrum 15
There are a number of drivers that affect the size of the sub-prime mortgage population 15
Sub-prime individuals are part of a broader population of non-standard individuals 17
The sub-prime mortgage population is now on the rise after a number of years of decline 19
The economic environment was more difficult for consumers because of high household debt 19
As a result, the number of sub-prime mortgage individuals reached 4.2 million in 2006 20
The sub-prime mortgage market grew by 28 per cent in gross advances in 2006 27
The sub-prime mortgage market continues to outperform the mainstream market 29
Moreover, the sector accounted for 7.1 per cent of the market in 2006 29
Remortgaging accounts for around half of advances in the sub-prime mortgage market 30
A strong mortgage market and rising sub-prime population were key to the market's growth 30
A healthy mortgage market in general helped to drive the sub-prime mortgage market forwards 30
House prices performed better than expected in 2006 31
The sub-prime mortgage population is now on the rise 32
Consumers are becoming increasingly aware of the sub-prime sector 32
Although in percentage terms, consumer awareness remains low 33
Moreover, the future outlook of the UK sub-prime mortgage market looks bright 33
The methodology for the UK sub-prime mortgage market incorporates variation in mortgage penetration 33
Datamonitor forecasts three scenarios for the sub-prime mortgage market 33
In Datamonitor's opinion the UK sub-prime market will slow, but will grow faster than the mainstream market 34
In a best case scenario, the sub-prime market grows more slowly than the mainstream market 37
In a worst case scenario, the sub-prime mortgage market will contract significantly 40
Competitive dynamics of the UK sub-prime mortgage market 42
The market is host to specialists, mainstream lenders and investment banks 42
While the market has changed substantially, specialist lenders continue to dominate the market 42
Investment banks began to get involved in 2000 44
Mainstream lenders have also entered the market 44
In particular, building societies have increased their presence in the non-standard market, mainly through small players 44
In terms of gross advances share, the market is still dominated by specialist players 44
GMAC-RFC, GE Money Home Lending and Kensington Mortgage Group lead the pack 44
Most lenders had a successful year in 2006 45
The sub-prime mortgage market has become increasingly competitive 46
Increased competition has led to the emergence of a number of individual sub-markets 46
The near-prime segment has become the largest and most competitive sub-segment in the sub-prime mortgage market 48
The market now has a large number of players 48
It appears that there are now too many players for the size of the market 50
The medium/heavy segment is smaller and somewhat less competitive 51
The medium/heavy sub-prime sector has fewer participating lenders 51
While competition has intensified, it is not yet at the same stage as that of the near-prime sector 51
Moreover, packagers dominate this market, in contrast to brokers in the near-prime market 51
In fact, technology is not used to the same degree either 51
But this segment could see a rise in custom in a few years' time, with competition tightening too 52
Meanwhile, pricing has become progressively tougher 52
As a result, margins have been falling 53
Going forward, established lenders in particular will need to readjust their models and expectations 54
Players must adopt new ways of competing in a more saturated market 54
Cost efficiency and funding will become crucial to overall success 54
The packaging industry will come under consolidation 54
Some lenders will look to expand into other markets 55
Some lenders will enter European sub-prime mortgage markets 55
Other lenders are looking to enter the UK commercial mortgage market 56
Issues in the UK sub-prime mortgage market 57
By loosening their criteria, lenders are taking on more risk as household debt remains high 57
Consumers continue to hold significant debts 57
Such a situation could be unsafe given that lenders have been taking on more risk in the last few years 58
But most believe that the situation is under control 59
Some of the newer lenders may be the ones taking on most risk 59
Events in the US sub-prime mortgage market hit many lenders by surprise 59
A significant number of sub-prime mortgage firms are now in financial trouble 60
Such a situation points to lenders who became too aggressive 60
With high levels of indebtedness, the UK does merit some concern 60
The UK sub-prime mortgage market is likely to avoid a similar fate given its significant differences 61
It appears that as of yet, lenders have not changed their overall risk strategy 62
Yet some remain anxious 62
Lenders should take the US events as a lesson learned nonetheless 62
The sub-prime mortgage market is now under heavier regulatory scrutiny than before 63
The FSA found a mixed picture of sub-prime mortgage broker compliance in late 2006 63
It is too early to speculate, but the FSA may end up implementing new regulation of sub-prime lenders 63
Moreover, lenders are wary of the European Commission's possible plans for mortgage market integration 63
Lenders are waiting for the White Paper in September 2007 64
Mortgage redemptions will become a drain on profits for those who depend on them 64
Sub-prime customers are becoming increasingly financially sophisticated 64
Such a trend is impacting lenders' profits 65
Conclusions 65
APPENDIX 66
Supplementary data 66
Data tables for chapter 'The Sub-prime Mortgage Market in 2006 and Future Outlook' 66
Data tables for chapter 'Issues in the Sub-prime Mortgage Market' 70
Data tables for sizing methodologies 71
Definitions 72
AAGR 72
Balances outstanding 72
Bank of England base rate 72
CAGR 72
CCJs 72
Gross advances 73
LIBOR 73
Loan-to-value (LTV) 73
Mortgage intermediary 73
Non-standard 73
Remortgaging 73
Second charge loan 73
Sub-prime 73
Methodology 73
Sizing methodology for the UK non-standard population 74
Reasons for credit rejection 74
Elimination of double counting 74
Datamonitor uses seven steps to size the UK non-standard population 74
Bankruptcies are excluded because of double counting 77
Sizing methodology for the sub-prime mortgage population 77
Elimination of double counting 77
Five steps are used to size the UK sub-prime mortgage population 78
Bankrupts are excluded because of double counting 79
Sizing methodology for the UK sub-prime mortgage market 80
Step 1: Estimating the number of sub-prime households in the UK 80
Step 2: Estimating the number of sub-prime households with a mortgage 81
Step 3: Calculating the percentage of UK dwellings with a mortgage that is accounted for by the sub-prime mortgage population 87
Step 4: Estimating the value of the sub-prime mortgage market 87
Step 5: Adding in the self-certified sub-prime segment of the market 88
Step 6: Comparing the total to market shares of major UK sub-prime mortgage providers 89
Further reading 89
Relevant links 89
Ask the analyst 89
Datamonitor consulting 89
Disclaimer 90

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Table 1: UK non-standard population, 2002-2006 19
Table 2: Number of sub-prime mortgage individuals and their share of the total working population, 2002-2006 21
Table 3: Number of mortgage repossessions and arrears, 2002-2006 24
Table 4: Sub-prime mortgage market advances and the number of sub-prime mortgage households, 2002-2006 28
Table 5: Forecasted UK sub-prime mortgage market gross advances compared to the total UK mortgage market's gross advances and the UK sub-prime mortgage population under the Datamonitor's View scenario, 2006-2011f 36
Table 6: Forecasted UK sub-prime mortgage market gross advances compared to the total UK mortgage market's gross advances and the UK sub-prime mortgage population in a best case scenario, 2006-2011f 39
Table 7: Forecasted UK sub-prime mortgage market gross advances compared to the total UK mortgage market's gross advances and the UK sub-prime mortgage population in a worst case scenario, 2006-2011f 41
Table 8: List of sub-prime mortgage lenders, May 2007 43
Table 9: Number of CCJs registered and on record, 1987-2006 66
Table 10: Number of properties carrying an arrears or repossession record, 1997-2006 67
Table 11: Number of bankruptcies in England and Wales 67
Table 12: Year-on-year growth of the sub-prime, mainstream and total mortgage markets, 2003-2006 68
Table 13: UK mortgage market quarterly and annual gross advances, 2002-2006 68
Table 14: Annual house price growth on a quarterly basis, Q1 2003-Q4 2006 69
Table 15: Secured and unsecured debt-write offs by banks to individuals, December 2001-December 2006 70
Table 16: Percentage of individuals with a mortgage by employment status, 2006 71
Table 17: Percentage of individuals with a mortgage by socio-economic group, 2006 71
Table 18: Mortgage advances by group, indexed to the UK average, 2006 72
Table 19: UK dwellings by tenure, 2002-2006e 83
Table 20: Household tenure, 2006 86
Table 21: The percentage of UK dwellings with a mortgage that is accounted for by the sub-prime mortgage population, 2002-2006 87


Figure 1: Sub-prime individuals are part of a broader population of non-standard individuals, 2007 3
Figure 2: The number of sub-prime mortgage population is on the rise, 2002-2006 4
Figure 3: The sub-prime mortgage market had another solid year in 2006, 2002-2006 5
Figure 4: In Datamonitor's opinion the sub-prime mortgage market will reach £31.5 billion by 2011f, 2006-2011f 7
Figure 5: A certain degree of subjectivity is needed when differentiating groupings in the sub-prime mortgage market because some lenders are inevitably willing to accept greater risk than others, 2007 8
Figure 6: GMAC-RFC, GE Money Home Lending and Kensington Mortgage Group lead the sub-prime mortgage market in terms of gross advances, 2006 10
Figure 7: Drivers of the sub-prime mortgage population and their consequences, 2007 17
Figure 8: Sub-prime individuals are part of a broader population of non-standard individuals, 2007 18
Figure 9: The number of sub-prime mortgage population is on the rise, 2002-2006 21
Figure 10: The number of CCJs on record increased for the first time since 1995, 1987-2006 23
Figure 11: Arrears and repossessions on record have continued to decline but it may not be long until they begin to rise once again, 1997-2006 25
Figure 12: Bankruptcies have continued to increase in recent years, 1997-2006 26
Figure 13: The sub-prime mortgage market had another solid year in 2006, 2002-2006 28
Figure 14: The sub-prime mortgage market continues to outperform the mainstream market, 2003-2006 29
Figure 15: Gross advances in the UK mortgage market were at a record-breaking level in 2006, 2002-2006 31
Figure 16: Data from both Halifax and Nationwide highlights that house price growth picked up in 2006 after appearing to cool down in 2005 , Q1 2003 - Q4 2006 32
Figure 17: In Datamonitor's opinion the UK sub-prime mortgage market will reach £31.5 billion by 2011f, 2006-2011f 35
Figure 18: Under an optimistic view, the sub-prime mortgage market will reach £29.9 billion by 2011f, 2006-2011f 38
Figure 19: Under an pessimistic view, the sub-prime mortgage market will reach £24.1 billion by 2011f, 2006-2011f 40
Figure 20: GMAC-RFC, GE Money Home Lending and Kensington Mortgage Group lead the sub-prime mortgage market in terms of gross advances, 2006 45
Figure 21: A certain degree of subjectivity is needed when differentiating groupings in the sub-prime mortgage market because some lenders are inevitably willing to accept greater risk than others, 2007 47
Figure 22: The average UK adult owed £4,522 in unsecured personal debt at the end of 2006, 2002-2006 58
Figure 23: The number of secured and unsecured debt-write offs by banks has continued to increase in the UK, December 2001-December 2006 61
Figure 24: It is important to exclude segments of the population not relevant to an estimation of the UK sub-prime mortgage market 80
Figure 25: Methodology used to calculate the number of sub-prime households in the UK 81
Figure 26: Households eliminated in Datamonitor's estimation of sub-prime households with a mortgage 82
Figure 27: The self-employed population are much more likely to have a mortgage than the unemployed population, 2006 84
Figure 28: DE households are easily the least likely socio-economic group to own their property with a mortgage, 2006 85
Figure 29: Compared to the mainstream market, a much greater proportion of sub-prime households are rented from local authorities and far fewer are owned with a mortgage, 2006 86
Figure 30: The average mortgage loan advanced to self-employed borrowers is actually higher than the average advance across the UK mortgage market as a whole, 2006 88

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