Beyond bridging

30 November 2009 | By Robert Thickett

When Mortgage Strategy last spoke to George Patellis in 2008 he was doing unpaid consultancy work for the now defunct packager association the Regulatory Alliance of Mortgage Packagers.

Having worked for the previous 20 years for lenders on either side of the Atlantic and Australia, and set up Preferred Mortgages, the Washington DC-born American had been drafted in to help the association set up its own lender.

When Patellis set up Preferred in the late 1990s with fellow Americans Dennis Pitocco and Richard Klemmer, while there may have been a few bumps along the way as the firm started out, timing was on its side.

Regrettably, the same could not be said of RAMP when it looked to set up its lender, with the market enveloped by the biggest global downturn in a generation.

So a year on it’s good to speak to Patellis again, this time under happier circumstances following his appointment last week as chief executive officer of Tiuta. The bridging lender is looking to expand its interests and Patellis, a mortgage man to the core, is charged with helping it move forward.

When he left the UK market in 2005 it was as joint chief executive of Preferred, a firm Patellis had been involved in on and off since its inception in 1996. The original backer of Preferred was Tampa-based IMC, which set up the UK lender as a joint venture with Rotch Property Group and FSA of New York. When IMC was subsequently taken over by Citibank the future of its fledgling UK-based operation looked in doubt.

Fortunately Rotch increased its stake, allowing Preferred to slowly but surely expand its presence in the UK mortgage market. It was also during this time that Barclays Private Equity backed the management team at Preferred by funding a management buyout.

Pivotal to its expansion was working with the likes of Paul Robinson, managing director of Portsmouth-based packager Solent Mortgage Services, and building a distribution model of part-nership lending with packagers.

Back then Preferred was riding the property boom. Of course, it was a different story in 2008 when Patellis was looking to help Robinson and his then associates at RAMP set up their lender.

Since leaving Preferred in 2006 following the company’s sale to Lehman Brothers, Patellis had returned with his family to the US and settled in New Jersey. There he worked for a firm called Credit Based Asset Servicing and Securitisation, a large issuer, servicer and investor in residential mortgage assets in New York.

He also worked with Bear Stearns, looking at replicating the partnership lending model at its UK operation Rooftop Mortgages.

But when markets started to contract in the summer of 2007 lenders across the world had to curtail their plans. This proved to be the case for Rooftop and ultimately for RAMP too.

Despite the nationalisation of Northern Rock in September 2007, Patellis says when he joined RAMP in November 2007 the proposition the group had put together was phenomenal but the market was starting to unravel.

“RAMP’s members had started to see their business levels go downhill and were beginning to ask whether it made sense to put money into a new venture when things were so uncertain,” he says. “The answer was no - it was a matter of survival for everybody.

“Professionals such as Robinson at Solent and Simon Mouncher at Em-financial are entrepreneurs. They were hustling to keep their businesses going but I don’t think anyone knew how bad things were going to get or how long the bad times would last.”

That said, Patellis says John Rice, managing director of RAMP, has always had an uncanny knack of seeing two or three months down the line and he foresaw that things were going to get a lot worse.

Unfortunately, Rice was right. Some of Patellis’ friends in the US were already starting to see their businesses collapse.

“One of my best friends in Miami owned a valuation firm and he was telling me that things were going bad,” he says. “He had a big business with a lot of people working for him but he shut his office and started working from home. And this was before things got really bad over here.

“Another friend of mine was a sub-prime sales representative in Florida. He told me he had no real products to sell and the ones he had were impossible to shift. In other words, it was a way for the lender to remain in the market without truly being a part of it.”

The dismal news from the US quickly spread around the world. With the chances of launching a UK lender looking slim, in April 2008 Patellis’ paid consultancy period with RAMP came to an end but he continued to work for the organisation in an unpaid capacity and was still positive about the market, particularly with regard to the future of packagers.

“Packagers have to broaden their horizons and get involved with things they either didn’t have the time for or didn’t know a lot about,” he said towards the end of Mortgage Strategy’s interview with him in 2008.

“But I think they still have a role, especially as there will be a flight to quality when the market returns. I believe professional packagers bring a lot of value to the process. They’re smart guys. They’ll find a way to come up with something that will break that niche until the market comes back.”

But that was prior to the collapse of Lehmans and the subsequent government bailouts of HBOS and the Royal Bank of Scotland. With the market in freefall the problems facing their businesses have proved insurmountable for many. While a handful of packagers have found a way to survive including All Types of Mortgages and Solent, many other members of RAMP were not so lucky and the organisation collapsed in January this year.

“It was difficult for me to see people I considered good friends having such a tough time and having to do things they’d never done before such as letting people go,” he says. “For them, the question at the time was whether to keep pumping money in or to reinvent their businesses.”

With his appointment as CEO of Tiuta Patellis is looking to change the firm from being simply a bridging lender to consider opportunities in longer-term lending. The appointment came four months after Patellis joined the firm as a consultant and he replaces Gary Booth.

Patellis says Tiuta first got in touch with him in July. Guy Garrard was taken on as head of business development at the firm in May 2009. Garrard first met Patellis when he was director of business development at Em-financial and also worked with him at Rooftop.

The firm outlined to Garrard some of the things it wanted to do and that was when Patellis’ name entered the frame.

“The management felt they didn’t have the knowledge within the firm to do some of the things they wanted to,” says Patellis.

So in August he was taken on as a special adviser to the board.

“I’ve now been at the firm for a few months on a consultancy basis so the people there had time to work with me and get to know me,” he says. “I’ve also got to know them and learn about the business - we’ve shared a variety of ideas.

“From their perspective it was like a four-month interview. I didn’t really understand when I started that this was where the assignment would lead me but there was a moment when I had a pretty clear vision of where the firm needed to go and how we could get there.”

Tiuta was founded in 2003 by Booth and Stephen Nicholas. Booth’s background was in property development while Nicholas was a partner at big City-based law firm Georgio Nicholas.

Tiuta is backed by between eight and 12 sources of funding ranging from private City money to high street banks. One investor is Connaught Asset Management and Tiuta is part of its Guaranteed Low Risk Income Fund. But the bridging lender wants to expand the type of products it offers and that is what it’s tapping into through Patellis.

“We are a bridging lender at the moment and successful at what we do, but we want to look at other things,” he says.

“Booth and Nicholas are entrepreneurs. They’ve had approaches from companies that want to do longer term lending. We are looking at a variety of structures to get alternative products to the market.”

So is it a case of if the firm can get funding for a specific type of product it will do it?

“That’s probably a good way of putting it,” says Patellis. “And it’s not just going to be lending for the sake of being in the market - it’s got to be something that makes sense.

“With the market the way it is you don’t need a product with bells and whistles attached - a pretty vanilla, middle-of-the-road deal is fine.”

At the beginning of November the firm launched a three-year fixed rate buy-to-let product at 6.99%. The deal allows for borrowing on 70% of a property’s open market value but not more than 85% of the purchase price. It also features a maximum loan size of £2.5m and has no redemption penalties in its third year. There is 110% rental calculation on the deal as well as a 3% facility fee that can be added to the loan amount.

Tiuta is clearly looking to innovate but it’s taking a cautious approach, and with good reason. In a magazine article with its investor Connaught in April this year the fund made much of the fact that Tiuta’s default rate was 7.4% for it’s total loan book.

This is remarkable considering the definition of a default in the short-term lending market is when a single contractual payment is more than 14 days overdue or the redemption is overdue by three months. The article went on to state that Tiuta has never suffered a loss from a bridging loan.

This cautious approach chimes with Patellis’ view of the market, in particular where things went wrong on both sides of the Atlantic.
“I have never been a fan of automated underwriting or automated valuation models for non-conforming loans,” he says.

He argues that they have a place in certain markets - maybe for up to 80% of what crosses an underwriter’s desk in a non-conforming operation. But it’s the remaining percentage that he says is problematic.

“I prefer to have every loan underwritten by a mandated underwriter with a full valuation in front of them,” he says.

And Patellis is not surprised by the increasing regulation sweeping the market, especially in light of the crisis we’ve just been through.

“It was a perfect storm and everything started with one big assumption - that house prices were going to keep rising forever,” he says.

“I remember at Preferred we would instruct valuations which were good for around 60 days but transactions often didn’t complete in that time because there was such a big chain involved so we’d often have to get fresh valuations. So you could have the original valuation done in January and then have to get a new one in March because the property had gone up by 12%.”

In the property boom the safety blanket of house prices perennially rising coddled many borrowers, brokers, lenders and especially investors in securitisations.

“Many firms got lazy and investors were no longer performing their own due diligence on transactions - they were relying on ratings given by agencies such as Moody’s, Standards & Poor’s and Fitch Ratings,” he says.

But this situation seems to be changing. In recent months the securitisation market has shown signs of life. At the end of September Lloyds Banking Group carried out a £4bn securitisation, car maker Volkswagen carried out a € 2.2trillion securitisation and at the end of October Nationwide launched a £3.5bn deal.

The early feedback is that the Lloyds group and Volkswagen deals were oversubscribed, with investors doing their own research.

“Ratings agencies will have a role in the future but there’s no way anyone will now invest in a deal without doing their own due diligence,” says Patellis.

And regarding the changes being proposed in the Financial Services Authority’s Mortgage Market Review, he is realistic about the prospects for the specialist lending market.

“Self-cert in its previous guise is probably gone forever, fast-track is gone and ultimately, whether the FSA formally gets rid of these products or not, it will be difficult for lenders to offer them anyway,” he says.

Which brings us to the next chapter for Tiuta. The lender’s current FSA permission is for arranging and entering into regulated mortgage contracts with no limitations.

The firm says this means it can theoretically offer whatever fits that description - in other words, just about anything.

But as always it’s down to funding and if the firm has the funding and ability to support a product it will be interested in getting the right product to market.

“We have a lot of projects lined up,” says Patellis. “But primarily it’s getting into longer-term lending that we are focussing on because we have had interest from various funding sources.”

So with the securitisation market slowly starting to thaw, will the firm be packaging originated loans on the basis that it will have an exit for them via a loan book sale or securitisation?

“As much as I’d like to say that the securitisation market will be back in the next 12 months or so I don’t believe we can count on that,” says Patellis.

“But we’re certainly having discussions with people about some loan book sales and we’re looking at various methods. For example, at the end of a three-year product we could have another loan available if external refinance is not available.”

And he says deposit-based lending is also on Tiuta’s list of things to consider.

“One thing I’m hoping to bring to the table is alternate sources of funding such as loan sales, forward commitments and other affinity relationships,” he says. “But we’re going to look at anything that will expand our funding base.”

So with the firm already having launched into buy-to-let would it consider launching into something like commercial lending?

“It’s appealing but we don’t have a whole lot of inhouse expertise with regard to commercial deals,” he says.

Another possibility could be working with experts in certain fields, such as the commercial sector, to help package cases.

“That’s the type of thing Garrard and I have spent a fair amount of time talking about,” he says. “It’s something we are interested in pursuing.

“Buy-to-let is a good example. We could not have opened that up to the market because it would have buried us. We keep it as a controlled distribution because it’s something that’s new to us and we want to make sure that we get it right.

“Anything that represents a fresh opportunity for us will involve controlled distribution whereby we can rely on industry experts to help us get from point A to point B,” he adds. “And completing the picture we will have Garrard mana-ging the process.”

Secured loans could be another route for the firm and Patellis does not rule out moving away from the prime market in time.

But whether that would represent a return to the days of heavy adverse is debatable, according to Patellis.

With rumours of some 30 lenders waiting to get approval or authorisation from the regulator, did he have any problems getting individual approval by the FSA?

He says the process was relatively painless.

“It was a pretty simple application,” he says. “I don’t know if things would have been different if I had not been approved before - if I was just some guy wandering in off the street.

“But I think the process is primarily there to ensure that applicants have not been in jail for mortgage fraud for 20 years and stuff like that.”
Meanwhile, with his position at Tiuta being made official Patellis’ top priority is to find somewhere permanent to live as he is currently sharing a flat.

With his family still based in New Jersey and his two children at school in the US he needs to find somewhere bigger so they can visit him.
“I love being in this country - I like the business environment here,” he says. “Obviously, I have lots of working relationships in the UK and I’m pleased that many are still in business after the crunch.

“The next phase of my life is going to be exciting - I’m looking forward to it. There are a lot of similarities between Tiuta and ventures I’ve been involved with in the past such as Preferred, so it’s good to be able to draw on that experience.”