Bucking the trend

2 November 2009 | By Robert Thickett, Christine Toner

In the wake of the recent Mortgage Market Review many in the industry have swung against the Financial Services Authority. Of course, the regulator’s popularity has never been particularly high but its latest consultation paper has spurred many to attack it in public. So to hear someone openly praise it - especially someone whose business will be directly affected by many of its recommendations - is a bit of a novelty.

But then Eugene Esterkin, managing director of bridging lender Affirmative Finance, has spent his career as a short-term lender listening less to what the masses say and focussing more on what he thinks makes business sense.

Speaking to Mortgage Strategy on the day the review came out, it is clear that Esterkin is convinced bringing all lending secured on homes within the remit of the FSA is a practical solution.

“I have no problem with regulation,” says Esterkin. “In fact, I think all lending should be regulated. If you take an industry such as lending and allow sharks to get into it they are bound to feed. There have been some lenders in both the long and short-term sectors that have been sharks and we don’t need them.

“Broadly speaking, the regulator does a good job. Sometimes it’s not entirely down-to-earth in the principles it espouses but in general terms it’s needed because consumers need protection and so do lenders.”

His understanding attitude towards the FSA may partly be explained by the fact that as a lawyer by trade he feels at ease with the sometimes complicated legalese churned out by the regulator that the industry is expected to decode.

In fact, Esterkin’s route into the financial services world was via the law. In 1983 he started to provide legal advice to a few financial firms and by 1985 was advising around 16.

Then, after 20 years’ representing other financial organisations, he decided he could make a better job of it himself. In February 2004 he set up Affirmative and in April that year did his first deal. Affirmative is funded by a combination of private money and bank funding.

“I wanted an easier life,” says Esterkin. “I thought it would be easier not being a lawyer and it was - for about six weeks.”

From this starting point the business mushroomed and now he spends 90% of his time on Affirmative and the rest running his law practice.

After 2004 Manchester-based Affirmative steadily expanded and now employs around 28 staff including BDMs such as industry stalwart Roger Morris and Esterkin’s daughter Jade dotted around the country.

The symptoms of the recession, from lenders withdrawing from lending and the collapse of the wholesale funding market to the general lack of capital and liquidity, have created a situation whereby many lenders have been reluctant to extend credit to anyone. The result has been to bring potential customers to Affirmative’s door.

Esterkin says his firm is now getting more enquiries about its services than it was in 2007.
“Whether we want to move ahead with those enquiries and take the opportunities they present is entirely up to us as a lender,” he says. “But the fact is that we are busier as a result of the recession because big banks have either run for the hills or restricted their criteria so dramatically that the majority of applicants don’t fall within them.”
There has been intense consolidation in the bridging sector of late. Esterkin says that whereas there were some 25 companies providing bridging finance in September 2007 there are probably now only half a dozen serious lenders in the market.
So with the number of bridging providers reduced and only the so-called Treasury Seven lending anything of significance, is this a time of opportunity for a firm such as Affirmative?
“If the deals on offer make sense the opportunity is huge at the moment,” he says. “What’s not so great is the general environment and the question is will that change in the next few years? Nobody knows. The fact is that we’re in stop mode at the moment and I mean almost the whole economy is in stop mode. If anyone says they know how things will turn out in 12 or 20 months’ time they are living in cloud cuckoo land.”
He suggests an analogy of the economy being like waiting for a bus, but the bus doesn’t come.

“What do you do?” he says. “You either thumb a lift or you get a taxi. Of course, our taxi is the US and always has been. But guess what - the taxi’s not for hire. The US taxi is not coming to save us this time because that country has its own problems, and if you want to thumb a lift it’s dangerous because the only people you can get a lift with at the moment are in the Far East or the Middle East.”

Esterkin argues that rather than looking abroad for help, the only way for the UK to claw its way out of this slump is through hard work.

“If we don’t do this work now we will be a second class country for the next 50 years,” he says. “China is already huge, and I went to India last year and saw that what it is doing is phenomenal too. The problem is that we’ve got no industry in this country and if we don’t get some we’re doomed to be second rate. The only way we can do that is to work our socks off and get out into the world.

“The US economy may correct itself quicker than the UK but I can’t imagine that it will pull us out of the recession in the short term.”

And perhaps surprisingly for a man whose livelihood is based on the property market, Esterkin is suspicious of the heights house prices reached before the bust and what lay behind the phenomenon.

“To say we had money in property was an illusion,” he says. “There never was any real money in property. This impression was created by a sort of unreal demand. Demand has to be deeply based and genuine, not only in the world of property and services but for all products. That’s why I say if this country does not start producing products and services soon we are destined to become a second class economy.”

But when the market has gone to pot, with firms going under, rising unemployment and big banks coming up with innovative reasons not to lend by the day, how is a small player like Affirmative able to keep lending? Esterkin’s golden rule of lending is to consider whether or not it makes sense.

“If we look at a transaction and see that it’s below our LTV level we’ll do it if it makes sense,” he says. “If it doesn’t fall within it we try to be more creative and find ways of helping people get the money they need to achieve their ambitions. Sometimes we can do this and sometimes we can’t.

“I had a discussion recently about a deal and it didn’t add up. Even though the LTV was ridiculously low it still didn’t make sense. You don’t lend to a borrower just because it’s at a low LTV - that’s got to be a starting point but the deal has to make sense. Basically, if it doesn’t, we don’t do it.”

The transactions Affirmative is seeing at the moment all have low LTVs. Before 2007 the firm did its fair share of non-status lending, with a limited amount of adverse business thrown in. But today the deals Affirmative lends on are decidedly upmarket in comparison.

“We’re getting offered transactions which banks should be grabbing borrowers’ arms off to get but they’re not doing that,” says Esterkin. “This is either because they don’t want to lend, they’re too scared or they haven’t got the money. I’m not clear which of these factors it is but lenders and banks are simply refusing to do the deals.”

In the next couple of years Esterkin has his sights set firmly on expanding the range of products Affirmative offers when it comes to longer-term lending.

“We plan to extend our offering in the long-term market in the next two years,” he says. “We’ve already got a small book that does long-term lending.”

He adds that demand is particularly high for medium-term secured loans.

“There is a big demand for anything between 12 months - which is where we usually stop - and five years,” he says. “If a company could come out with a product to fill that gap I think it would do extremely well. Whether it will be us is a matter for the future, but we plan to move slowly and surely into the longer-term lending market.”

Returning to the subject of regulation, the bridging and secured loan sectors come under the authority of the Office of Fair Trading but this could change either as a result of proposals in the FSA’s review or a change of government following next year’s General Election.

Regulating all loans secured on a property, from purchase mortgages to secured loans including buy-to-let, is a central recommendation of the regulator. Meanwhile, one of the Conservative Party’s pledges is to scrap the FSA and replace it with a Consumer Protection Agency. This new body would cover areas regulated by both the Office of Fair Trading and the FSA.

Esterkin likes this idea and also says he’s in favour of regulating the market across the board, with a single body dealing with all secured lending. He argues that having two systems of regulation has resulted in strange disparities.

“It cannot be logical to have a situation whereby borrowers can have second mortgages where they get a cooling-off period of seven days and first mortgages where they don’t,” he says. “Also, it can’t be logical to have credit regulated by the Consumer Credit Act which is a crazy piece of legislation that is unintelligible not only to the public but even to lawyers. I can tell you that most of them don’t understand it.

“If you ask the average lawyer or solicitor to interpret all the 190-plus sections of the CCA and look at the various regulations that affect secured lending you should not be surprised if they haven’t got the foggiest idea what you’re going on about.

“So the man on the street doesn’t understand it, his lawyer doesn’t understand it, his accountant doesn’t understand it and I don’t understand why we’ve got this double system of regulation,” he adds.

Esterkin is sanguine about the MMR’s recommendations with regard to regulation of the buy-to-let sector.

“As far as I’m concerned the FSA regulating buy-to-let would be absolutely fine,” he says.

He contends that if advice is given by properly regulated brokers the problems the market has experienced in the past few years should evaporate.

“If consumers are honest with themselves, they know whether they can afford a product or not,” he says. “But if they look at a product and are given the correct advice they can take an informed view on whether they would like to make a commitment.”

In terms of the market outlook, Esterkin anticipates that new entrants will come in which will increase competition. But he adds that there are a several lessons to be learnt from the current crisis and his concern is that if the market fails to take these on board it will go down the same disastrous route again.

“There are some good people involved in this business, many of whom have been around for the past 20 years,” he says. “They will be able to help if and when this country finally gets off its backside and starts to produce the goods and services the world wants. Only when this happens will stability truly return.”

Affirmative intends to maintain its present course and not be overwhelmed by the record levels of business it is receiving.

“We are seeing tremendous demand for bridging finance and short-term funds that is not being met,” he says. “And it’s not being met because the level of demand is unprecedented. There’s a danger in having that much demand because there’s a tendency to become about blasé business when it arrives by the bucketload. We’re trying not to fall into that trap.

“We’re trying to stick to our core principles and hope that staying close to these will help us maintain stability and profitability in the business.”
But while Affirmative has been growing the wider market has been shocked by the collapse of rival Link Lending.

Bridging firm Woodberry Securities relaunched as Link Lending in September 2006, headed by John Maclean, Paul Gower and Philip George and industry legend David Johnson.

On October 8 it was revealed that PricewaterhouseCoopers had been appointed as administrator and was working with staff to close the business. The lender’s 2008 accounts show it made a profit after tax of £94,391 for the year to September 2008 compared with a £874,810 profit in 2007. Link’s turnover rose 61% in 2008, from £5.8m in 2007 to £9.3m, leading to a rise in gross profit from £3.5m to £4.9m. But the cost of sales led to a loss of just over £4.4m while administrative losses totalled £4.5m.

The industry rumour is that it was the firm’s bank that pulled the plug and forced it to close its doors.

When the news of Link’s demise broke Esterkin contacted Johnson, as did many other bridging companies, to see if his firm could provide any assistance.

Esterkin argues that the collapse of Link was not a sign of an intrinsic weakness in the bridging market but rather an indication of banks’ unwillingness to extend credit to businesses or exercise flexibility in this regard.

“It’s a sign that banks are jumpy about any property-related lending in the UK and this story has yet to unfold for a lot more companies,” he says.

Esterkin believes history will judge that banks are reacting too quickly in the crisis, not only with regard to Link but also when it comes to other companies in the property market.

“Banks have got themselves in a mess,” he says. “Companies like us that are still doing good business, that are continuing to lend and remain profitable, are achieving this because of good management.

“Of course, I’m not saying that every company in the bridging sector is stable and profitable - I know that’s not the case. But if banks don’t start to look at the property market in a different way and if they fail to learn the lessons of the past 24 months they will find themselves heading down the same dangerous path again in five or 10 years’ time. And if they do that, they’re going to run into the same problems.”

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