Shadow Banks and Loans for Self-Employed Borrowers
An interesting trend is developing in the UK where loans for self-employed borrowers are concerned. Historically speaking, the self-employed have always found it more difficult to get mortgages and secured loans due to an inability to verify income as solidly as someone in a more traditional employment situation. Certain secondary lenders have stepped up to meet that need, though not as much as the self-employed would like. Shadow banks are changing that.
The 2008 financial crisis brought about significant changes in mortgage markets around the world. Here in the UK, a new round of regulations went into effect with the goal of preventing the irresponsible lending and borrowing that would have otherwise exacerbated a serious problem. As a result of those regulations, many self-employed people found it even harder to get mortgages and secured loans. That is, until recently.
According to a report on the Financial Times website, the last few years have seen a significant rise in the number of shadow banks stepping up to help people trying to borrow in non-traditional circumstances. One of the tools for doing so is something known as 'securitisation'. The Financial Times further reveals that securitisation is being used most often in the UK right now. Even more than in the US.
How Securitisation Works
Securitisation is the process of bundling multiple mortgages into a single package which can then be used as backing to sell a new security. For example, Acme Bank might make 25 different mortgages at Â£100,000 apiece then bundle them into a single trust. That trust is then used as collateral to sell bonds to institutional investors. Each of the mortgages in the securities portfolio acts collateral against those bonds.
Shadow banks use the securitisation strategy as a way to make loans to more risky borrowers. It works for them because they can always pass on the portfolios to bond purchasers if there is ever a fear of significant losses. As long as everyone involved is up to expectations, things function as intended.
How Shadow Banks Work
One more explanation might be helpful for understanding shadow banks and loans for self-employed borrowers: how shadow banks actually work. Shadow banking is the practice of an unregulated financial institution performing certain regulated banking functions. As a good example, a lot of the shadow banks involved in mortgage lending are actually not banks at all. They are investment funds performing the regulated function of mortgage lending without actually being a bank.
Shadow banking is perfectly legal and still regulated to some degree. The benefit to the self-employed is that shadow banking makes it possible for them to get secured loans and mortgages despite High Street banks being uncooperative. Between shadow banking and peer-to-peer lending, the self-employed have an easier time today than they had just a few years ago.
As a side note, there are a number of big-name banks that are beginning to relax requirements for self-employed borrowers. Where most of the banks were requiring 2 to 3 years of financial statements for mortgages and secured loans, several of them have recently agreed to accept a single year of documentation as long as borrowers can prove a sufficient work history.
Loans for self-employed individuals are certainly out there to be found. It just might require a little more work on behalf of borrowers. Property owners with equity they can offer as collateral should find it easier to shop for secured loans because they already have property to work with. First-time buyers generally have to look harder and shop around more. At the very least, things are getting easier.
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