Ambition is still the driver

1 September 2009

We meet in a small flat-cum-office south of Regents Park which serves as Steve Haggerty’s base when he’s in London.

In his role as chief executive of Crown Westfalen UK Haggerty is overseeing the growth strategy of mortgage servicer subsidiary Crown Mortgage Management and since joining the company in May he’s been dividing his time between London, Ipswich where the firm has offices and Harrogate which is his home.

Haggerty looks fit and bright-eyed but he’s not the sort of man to run a half-marathon around Regent’s Park before breakfast or work out in a gym during the lunch break.

We don’t discuss it so I might be wrong but he doesn’t appear to belong to the old school of management that believes there is a correlation between the waist-line of the chief executive and the bottom line of the business - success does not seem to be going to his stomach too much.

And despite all his years in Yorkshire Haggerty still speaks with a soft Somerset burr and doesn’t feel the need to offer sound bites on every issue.

This is not to imply that he has nothing to say but rather to suggest that he’s confident enough in himself not to feel the need to impress at every opportunity. In fact, at times one has to mine him for his views but inevitably one is well rewarded for the effort.

I want to talk to Haggerty for two reasons. First, to find out why he left his post as managing director of Skipton Building Society last December when at the beginning of 2008 he had been talking enthusiastically about his ambition to make the society the third largest in the UK.

Second, I want to explore his plans for Crown Mortgage Management - a company with roots in the commercial mortgage market. I wonder if it will provide a platform for him to emulate his achievements at HML.

When he took over as managing director of HML in September 2002 it had assets under management of £5.2bn and in five years grew to become the market leader with assets of more than £50bn.

So I dive in at the deep end and talk about his last year at Skipton. I quote him in an interview with Kate Mallord of Money Marketing last February.

“I believe in setting fairly hairy targets,” he confidently stated at the time. “We are in it for the long haul and want to be a major player. That means we need to be in the top three.”

I point out to Haggerty that in the interview he even talks of structural changes and enthusiastically about developing the counter-cyclical businesses in the Skipton group such as the credit reference agency and the independent financial advice subsidiary. But on December 3 he resigned.

“I’d like to know what prompted that change of heart,” I say.

“The excitement in that article was genuine because it was a new role,” says Haggerty. “Skipton had not had a managing director before so it was a new brief and there was a lot to be done. I got stuck in and believe we got a lot of things happening.

“We assembled a good team around us and I brought in people I knew and trusted from other parts of the group. For example, I got Tim Fletcher from Baseline Capital and Gordon Jolly from Amber Home Loans but there was always the spectre that at the end of the year Skipton’s chief executive John Goodfellow would be moving on.

“That was always going to be a watershed in terms of my career,” he says. “I harboured aspirations but knew I wasn’t the favourite to get the job - I knew David Cutter was in line. Even so, I thought I was the best candidate but it didn’t happen so I got stuck into what I had to do - respond to the changing market.

“I made some changes to the branch network and withdrew from commercial lending but at the end of the year, with Goodfellow going I felt it was time for a change. I had been there for 18 years and I needed to move on. Skipton is a lovely town but I was getting claustrophobic.”

It’s time for us to move on too and we start to talk about happier times at HML. The company’s growth has been spec- tacular but in retrospect a lot of this can be attributed to the fact that it was servicing the books of start-up lenders such as GMAC-RFC which, under executive chairman Stephen Knight’s guidance, grew from nothing to become the country’s 10th largest lender.

Bearing in mind the way the market has changed since then I ask Haggerty if he thinks such growth is still sustainable or more to the point how, as Crown Westfalen chief executive, he can grow Crown Mortgage Management now the days of the off-balance sheet lender are gone.

Haggerty is dismissive in the nicest possible way and makes the point that business is still there for the taking.

“In the past 10 months we have taken on eight new portfolios,” he says. “We’ve also acquired clients in the investment community, have had a standby contract invoked for more than £1bn worth of Northern Rock-originated commercial loans and are picking up work most of the time.”

Of course, taking on new business also means taking on new staff.

“We’re also taking on employees pretty consistently,” adds Haggerty. “I’ve set out my stall for growth, much as I did at HML. The secret with servicing is not to bring fixed costs on board too soon before you get business in.

“We’ve seen a lot of growth in our London office. We now have more than 40 employees there compared with what was a distinctly skinny operation before. This is because one of our clients has been particularly successful at acquiring mortgage assets. And we’ve also seen the Ipswich office grow from around 90 people to 120.” But this fails to inform me about his growth plans so I ask if he retains his willingness to set ambitious targets.

“I like big targets and round numbers,” he says, grinning. “We have some £3.5bn under management. This figure was less than £3bn when I joined and I’ve set an objective of £10bn by 2010.

“So my brief at Crown Mortgage Management is to grow the business and sort of make it into a second HML. But just as with HML we need scale and for me, anything below £10bn is sub-scale. You can’t have a conversation with serious players if you haven’t got that sort of scale because you need to give them confidence. So that’s the first hurdle.”

Haggerty concedes that this is an ambitious target but I ask if it is realistic in the present climate. He soon counters my scepticism.

“I believe that a third party mortgage servicer, if set up properly, should be almost immune to economic cycles,” he says.

“It should have enough flexibility built into its model to prosper, whatever is happening in the wider marketplace. So when a sector is booming it can provide a quick, flexible route to market for new entrants and similarly, when a market is tailing off and lenders are looking for an exit strategy, the emphasis should move from new lending to collections and special servicing.”

On the topic of centralised lenders Haggerty says that companies leaving the market might look for what is known as portfolio parking.

“If a company can’t sell a book at the right price or does not want to take a loss we can offer to take the hassle away from it so it can have some breathing space. It can dismantle its infrastructure if necessary, get rid of staff and premises but keep the value of its assets. We can do the data integrity side, cleaning up books and making them more saleable.”

But he adds that with few exceptions centralised lenders are rocking on their heels at the moment, often selling their assets at heavy discounts.

“The investment community has latched onto that and is buying assets at big discounts, but the organisations involved are not regulated entities,” he says. “They need a regulated company and we have positioned ourselves to fulfil that requirement.”

And so we find ourselves talking about the Financial Services Authority’s Treating Customers Fairly initiative, especially with regard to where the investors that buy these discounted mortgage books stand on the issue.

Haggerty reaffirms that the firms buying these portfolios are not regulated and don’t necessarily take a view on mortgage customers.

“We will be the outfit that ensures TCF and the Mortgage Conduct of Business rules are adhered to,” he says. “We have our own arrears policy - in my experience of third party servicing, servicers often hide behind lenders’ arrears policies and do as they are told.

“I don’t think that washes in the current market so we are saying to clients - we have our own arrears policy, this is what we believe works so if you agree come and work with us.”

And the business opportunities seem infinite as Haggerty goes on to cite mature lenders which need to deleverage their balance sheets.

“There are building societies that did non-member business through, say, Amber-originated books,” he says. “Societies are under pressure to raise tier 1 capital and the obvious solution is to shed assets but this will only happen if they can do it at the right price.”

I express an interest in the progress of his company’s pitch to the Irish gov- ernment’s National Asset Management Agency which has the formidable task of managing toxic assets of some €90bn. Haggerty seems surprised that this information is in the public domain.

“That bit of work was for some consultancy work with Ireland’s Central Bank to advise it on how to manage toxic assets,” he says. “We pitched for the work and got onto a short list of seven which is quite an achievement when you consider there were more that 70 tenders.

“I think we did a decent job to get that far and there’s undoubtedly more work to be done. That was the first phase and the Irish authorities will be looking for other services in the future. We will be looking to help them.”

That suggests the Irish pitch was almost successful so I wonder if his firm could do a similar job for UK Financial Investments.

“Could you look after the UK government’s investments in the Royal Bank of Scotland, Lloyds Banking Group or Bradford & Bingley?” I ask.

This is obviously a big issue for Haggerty - a sort of hobby horse.

“In terms of some of the smaller failed entities - the Heritable Banks and B&Bs of this world - the authorities seem to appoint one of the big four accountancy firms to go in and sort things out, run companies in the short term and then find solutions,” he says.

“I believe this is the wrong approach. It’s not doing the right thing either by taxpayers or by contributors to the Financial Services Compensation Scheme that want their money back.

“Accountants have no incentive to come up with speedy solutions,” Haggerty adds. “They draw chunky fees at the expense of taxpayers. I think UKFI should get the servicing community to go in and do the job.

“We would do it for much less cost plus we understand the assets and products so we could do a better job in terms of loss mitigation. And we’d get a faster return for taxpayers too.”

Word association is a funny thing. We are talking about dodgy assets and before we know it we find ourselves discussing the return of retail mortgage-backed securities. Haggerty thinks these will they have to come back at some point.

“There has to be a vehicle with which the industry can bridge the funding gap left by retail savings,” he says.

“Lenders are going to have to find vehicles to take mortgages off their balance sheets because the capital regime is such that they can’t afford to hold all the assts they originate. Without a secondary market this will act as a brake on recovery. I reckon the covered bond market will return first.”

It seems to be coming back already, I suggest, and Haggerty agrees but qualifies his assessment.

“It’s beginning to come back but most lenders are - or were - using covered bonds to gain access to the government’s Special Liquidity Scheme so they weren’t publicly trading them,” he says. “They will come back and securitisation will follow in some form, but that will be in a couple of years.”

I wonder where Haggerty and his firm will be positioned at that time and return to my opening gambit - his interview in February last year.

“That was when you were appointed managing director of Skipton,” I remind him. “Back then you said your ambition was to run a big society but has your new job put that on the back burner?”

Haggerty responds laconically.

“Well, Skipton seemed to be heading that way anyhow,” he says, “But at some point I would still like to be at the helm of a big society.”

This aspiration is no idle fantasy. Haggerty has an agenda.

“There are a lot of apologists for societies who are almost too risk-adverse at the moment,” he says. “I think societies are vital to provide balance in the market, particularly in the current climate. “The Abbeys of this world - companies that have access to cheap wholesale funding - are filling their boots and doing all the sub-75% LTV business while societies are left picking up scraps as they have to rely on retail funding, the price of which is being pushed up by the banks.

“At a time when they should be aiding the recovery and getting lending going again almost all societies are lending less this year than they were last,” he adds. “That’s nonsense.”

I put it to him that societies have to manage their balance sheets.

“Yes, because they have criteria to meet in terms of solvency and tier 1 capital they are doing repair jobs and looking inward,” he says. “But I’d like to think they could be contributing more to the market.

“And of course they have fallen foul of the FSCS levy, with all of them taking big hits for things that were not their fault.”

Finally, we get round to talking about the commercial mortgage market in which Crown Mortgage Management started as a servicer.

“That sector must be taking a massive hit at the moment,” I venture.

Haggerty agrees, but as always he sees opportunities.

“The commercial market is lagging behind the residential sector,” he says. “Undoubtedly, when the investment community recognises that opportunities in the residential sector are tailing off organisations will make a play for commercial assets.

“These will then be purchased at the appropriate price and returned to performing status.”

No doubt when that happens, Crown Mortgage Management will be in on the LSact.