A bellwether for the industry

Lending Strategy 01 November 2009

I first met Paul Hunt, managing director of Phoebus Software, at an awards ceremony this July. The event was a bit like Eurovision meets the mortgage industry. There were plenty of prizes but the difference was that nobody was singing. It was pretty noisy so, with the razzmatazz making conversation difficult, we decided to continue our talk another time.

This was a pity as he is an interesting conversationalist and Phoebus, judging from what Hunt said at our initial encounter, could be a bellwether for the industry. So we arranged to meet again, this time in a quiet room at Lending Strategy’s London headquarters.

We start by referring to our earlier exchange. And yes, I had heard right the first time, Hunt qualified as a chartered accountant in England before honing his skills in banking and mortgage lending in the Cayman Islands and Iran.

As a career starting point that’s colourful but I try to ignore this and I ask Hunt if his apprenticeship abroad has served him well. He answers in the affirmative.

“The Cayman Islands is a great place to see an economy at work and learn about the workings of the financial system.”
And as for Phoebus being a bellwether for the market there could be something in that too. Looking back to the Icelandic banking crisis Hunt says that from Phoebus’ point of view the market went down fast.

Phoebus, which celebrates its 20th anniversary this month, started life as an IT subsidiary of Heritable Bank and developed a banking and mortgage system for its UK operation. Heritable was one Phoebus client that didn’t do too well dur- ing the credit crunch. Nor did Salt, the commercial lending arm of Derbyshire Building Society. Meanwhile, other specialist lenders on its books had to retrench deeply.

“One by one lenders stopped spending on systems development,” says Hunt.

But with the company picking up several clients in the past 12 months, that’s all changing.

“We’re starting to see more firms talking to us about servicing which you’d expect, but they’re also talking about or- igination systems again,” he says.

“They want a servicing system now and then, say, an origination system next January. But funding is still an issue.”

However, Hunt is cautious about a wider recovery as is clear from his comment on Nationwide’s house price figures in which he reminds us that prices are only half the housing story.

Although the number of housing transactions has increased each month from a low of 27,200 in January to more than double that in the summer Hunt argues that this is still a fall of almost 50% compared with the longer term average of 105,270 sales per month from 2001 to 2007.

“Bearing that in mind and given the deleveraging the Financial Services Authority is imposing on lenders, do you think they will have to adjust permanently to a lower level of transactions and if so, how will that affect their IT requirements?” I ask.
Hunt is animated in his response.

“It could have a significant impact,” he says “The remortgaging market is going to be particularly interesting. Will it come back? I don’t know.

“There’s going to be more control of the market. As for IT requirements, in terms of servicing it doesn’t make a lot of difference. Once data is fed into the servicing function the process works well - you can migrate it to another system. But the front end may have to get more sophisticated, with links to credit bureaux and other sources.”

Hunt doesn’t think there’ll be as much aggressive competition in the remortgage market for the foreseeable future.

“Doing a mortgage in 30 seconds won’t be such a factor,” he observes. “At the moment, if someone comes into the market with a tract of funding it goes in days and then the door is closed.

“Go back a few years and money was always available. The market was competitive so the pressure was to originate. Servicing was not great because everyone was locked into origination. Now books are being cleaned up and data is more visible. That will filter into origination.

“Looking ahead, I can’t see the level of lending getting back to what it was two years ago,” he adds. “Margins will probably stay high, as will fees.”

The dilemma of legacy systems
One of Hunt’s big concerns is the effect legacy systems are having on servicing standards, particularly with regard to the FSA’s Treating Customers Fairly initiative. Thus, in June he called on the FSA to address the issue.

“TCF and the Mortgage Pre-Action Protocol require more interaction with customers and outdated IT systems may be unable to cope,” he said at the time.

His lobbying coincided with an FSA review of the way specialist lenders and third party administrators handle arrears and repossessions. This found that in many cases the focus was on recovery and swift legal action rather than keeping people in their homes.

So I suggest to Hunt that it’s about strategy rather than systems because most specialist lenders were new to the market and would have had state-of-the-art IT anyhow. He argues that both factors played a part.

“Look back a few years and you’ll see that professionals weren’t that interested in servicing systems - they were focussed on origination so they bought the market-leading system in that regard,” he says.

“But the market leader, by nature of its position, was a legacy system. That’s now changed - it’s servicing that has become important.

“Systems should be there to automate as many processes as possible because what is needed is real people speaking directly to customers on the telephone or writing letters to them,” he adds.

“Problems occur when data is not accessible from the system. Then you’ve got to go back to manual processes, pull files out of a drawer and find out who is in arrears. This obviously slows the process down. So if you’ve got 100 people working in the collections arena, 50 are spending their time putting information together while the rest are on the phone.

“The thing about having a good automated process is that you know the position of borrowers possibly going into arrears so you can do risk management and automate the dialogue,” he adds. “You’re already speaking to them before you have to do all that investigation - And all the information is readily available on the screen.”

But has the FSA responded to lobbying? In August Phoebus conducted research which showed that 53% of lenders were servicing mortgages on systems that couldn’t cope with the increasing demands of the FSA and the government, especially with regard to TCF.

With the top five lenders accounting for 80% of the market I suggest it is anybody’s guess how many customers could be falling under the umbrella of legacy systems. Hunt agrees.

“It’s hard to pin down a figure because firms won’t discuss volume,” he says.
But he is adamant that there’s a big problem. He says some lenders are changing their systems, but therein lies another problem.

“They’re not always changing their systems for the better but rather going back to a point where it is easier to migrate data to an older system,” he says. “So what is a legacy today might be an even worse legacy in a few years’ time.”

We return to the subject of outsourcing which Hunt, with three outsourcers added to his client list in the past nine months, naturally regards as a strong proposition.

“We’ve now got around half a dozen outsourcers using our software,” he says. “Such companies are set up to service lending and they tend to bring in the best professionals.”

A strong proposition it may be but it’s a path that building societies in particular have been reluctant to go down. I ask Hunt if that could change, with the Treasury reporting soon on a proposal for societies to share back office services.

“It depends if they are prepared to talk to each other,” says Hunt. “In terms of efficiency I don’t think they’ve got a choice, particularly the smaller ones. They’ve got to change, but will they?”

So we leave the matter hanging. There’s just one question left on my agenda. It relates to local authorities re-entering the mortgage market.

“Last summer Phoebus produced a white paper on the subject but have interested parties such as Liverpool and Manchester councils followed through?” I ask.

“We got pretty excited about this,” says Hunt. “But when we talked to councils it became apparent there was a knowledge gap. We’ve got people who can help them through installation but the critical factor is running the process.”

I ask if that skill set has disappeared.

“No, it’s still there because the right people are available,” he says. “What we have not seen is a move to bring them in.”

I venture that this is a shame because there’s now nobody available to help marginal borrowers.

“But isn’t that the role of local societies?” responds Hunt.

Perhaps that’s true but I wouldn’t want LSto be the one to suggest it to the FSA.