Giant on the south coast

28 September 2009

This has spurred people to talk about consolidation in the market. At the beginning of the year there was much talk of network X getting taken over by network Y. And in May, when everyone was focussed on the slow collapse of Network Data, a network merger did take place. But to everyone’s surprise the deal struck was actually between Mortgage Next and Mortgage Intelligence.

European Financial Solutions, the parent company of Mortgage Next, bought Mortgage Intelligence from Close Brothers for an undisclosed sum to create a mortgage distribution giant on the south coast. As part of the deal Mortgage Next’s offices in Caterham, Surrey were closed, with both brands to be operated out of Mortgage Intelligence’s Bournemouth-based offices.

Some six months on, the two brands continue to operate separately under the new umbrella of Mortgage Intelligence Holdings. The two businesses combined have a total of 302 AR firms, which equates to 545 advisers, and it also has two clubs for directly authorised brokers with a total number of more than 10,000.

And all this is under the control of Sally Laker, who as part of the deal was made managing director of Mortgage Intelligence Holdings. So why in the middle of the worst financial crisis for two decades was the decision made to merge the two firms?

“The main attraction for the deal is that the ethos of the companies is similar,” says Laker. “We offer a personalised service, you’re not a number, we try to deliver what we say on the tin, what we offer is what you get. Obviously we’re still getting to know the Mortgage Next brokers, but the same ethos applies. The two companies are similar in the way they work.”

When the deal was announced Laker was reported as saying that there were no plans to get rid of the Mortgage Next brand. And on arriving at Mortgage Intelligence’s offices - which have a fantastic view of Bournemouth beach - it’s clear to see the firm has been true to its word with Mortgage Next clearly emblazoned on the front door.

But the closure of Mortgage Next’s Caterham offices obviously led to staff leaving, including Mortgage Next’s managing director Gemma Harle.

Laker says that a number of Mortgage Next staff have stayed on but they have mainly been field staff. She says the main problem was that with Caterham to Bournemouth being a two and a half hour drive, unless staff had been willing to move, the distance was not commutable.

“We were able to bring everything across to Bournemouth from Caterham quite quickly,” she says. “By the end of June everything was 100% at the Bournemouth offices.”

And she re-emphasises that Mortgage Next is here to stay.

“As we have one cost centre in Bournemouth having two brands is not a problem,” she says. “And actually I’m a real brand person and have spent years building up a brand that people love. The brokers from Mortgage Next like the brand in the same way that Mortgage Intelligence brokers like the Mortgage Intelligence brand. I want to keep that because it’s of value to us. I’ve always been fond of Mortgage Next alongside Mortgage Intelligence.”

With the change in ownership of Mortgage Intelligence from Close Brothers to EFS, Laker has swapped one investment firm for another. EFS is part of JZ International, which is the European affiliate of private investment firm The Jordan Company. Based in New York, the firm employs around 20,000 staff worldwide and has around US$6bn worth of funds under management.

JZ International has finance brokerages in Spain, Norway, Ireland and Finland. From what she’s seen so far Laker says there are many similarities in the make-up of Close Brothers and EFS with a focus on letting the people in the business run the business.

“From our perspective EFS wanted to increase its UK presence and from a deal perspective it’s worked well,” she says. “The new parent company has a number of different businesses, so in terms of structure it’s similar to the way Close Brothers was run - lots of businesses all run independently. It’s working well for us.”

On the question of whether more network acquisitions could be on the cards, Laker describes EFS as a go-ahead company. “It’s always looking at a deal that might be the right one at the right time,” she says. “That’s part of the attraction of the new parent - its entrepreneurial.”

But in the light of the widespread financial problems that many firms have suffered, why would anyone want to buy a network in the current environment?

If you speak to the large networks in the market about why they turned their noses up at buying the likes of Network Data and Premier Network Group, the answer is simple - why buy it when you might as well wait for it to collapse.

“It’s a difficult one,” Laker admits. “The reason why our deal went through is because both Mortgage Next and Mortgage Intelligence were not on the verge of collapse. We had known each other for a long time and we’d had talks in the past so there was a little bit of knowledge about the businesses.

“It wasn’t a fire sale, it was two well balanced, well financed firms coming together which made it an attractive proposition. The difficulty is in knowing what you are getting with any company now because if you are looking at the accounts from last year, they might not reflect the current position. So it’s about being aware of what you’re looking at.”

The knock-on effect of large networks collapsing has been a large number of ARs within networks looking at alternative firms in the market. A quick read of some messages on online broker forums reveals a common complaint when they look at other networks - the larger networks are a lot more expensive than the network they were previously a member of.

It’s the same when it comes to the level of network interference and oversight of brokers’ business - the new firms want to keep an eye on what they’re doing. One broker recently told Mortgage Strategy that the last time they’d had a visit from their recently collapsed network was after Mortgage Day. They went on to admit that in their experience they’d had more oversight under the old Mortgage Code Compliance Board regime.

So has part of the problem been that ARs have not been appreciative of how a proper network should actually work?

“We’ve always said we’re not the cheapest and we will ask ARs to follow procedures that will help them sleep at night,” says Laker. “On Mortgage Day, because it was so new nobody was 100% sure what being an AR of a network meant, because unless they’d been in financial services they would not have experienced that. They had the MCCB which would have visited them but it was all done on a voluntary basis.

“I think brokers now understand what being an AR means, it’s just all networks have a different degree of how far that goes.”

Many brokers were left heavily out of pocket by the collapse of Network Data leading many, in particular its ARs, to question why the Financial Services Authority didn’t step in sooner.

“I feel for the brokers who have lost huge sums of money and I think one of the things is that they were under the impression there was an answer and they would get their money,” says Laker. “They were in a difficult position regarding whether they walk away and take a chance or stay in the hope that they would get their money. I’m amazed at the brokers who have been able to survive with those big amounts outstanding.”

Part of the problem she says is that when M-Day kicked in there were 100 networks and it was hard for brokers to check their financial credibility as some of them were new.

“How do you check the financial safety and credibility if the network has got no track record?” she says.

It’s a good question. As she points out, becoming an AR of a net-work is a bit of a business partnership. If you pick the wrong partner or are unaware that the network might be in financial trouble it’s ARs who could get hit as well as the network, as we saw with Network Data.

“There has been some debate about whether networks should ring-fence proc fees and have them in a separate account,” says Laker. “But we pay proc fees before we get the money ourselves so we don’t need to do that because we give brokers an upfront cash loan before we get the money from lenders. If I was a broker, things like that would be pretty key.”

This gets back to the classic problem of if something is ridiculously cheap and seems too good to be true, it usually is.

“Running a compliant network is not a cheap business and it does cost in terms of time, people, systems and expertise,” she adds.

Both Mortgage Next and Mortgage Intelligence had different ways of charging ARs. For the latter the charging structure was on a percentage of turnover basis whereas with Mortgage Next ARs were charged on a per application basis. When the two networks merged, both charging structures were maintained for the respective ARs of each network and Laker sees this as appealing to ARs.

Mortgage Intelligence was early in encouraging its ARs to market bundled utilities packages and has made a similar push to help them focus more on general insurance and protection. But there is no getting away from the fact that the mortgage market has been hard hit.

“It’s the funding side of things that is tough,” says Laker. “There’s certainly demand and it’s frustrating for brokers to have applications they can’t do anything with. There is little competition in terms of number of lenders. Everyone is in the same space with a low LTV - the nice business they want.

“It needs a form of revised securitisation - something that brings new lenders into the fray which will take the pressure off the lenders that are actually lending so there is a bit more funding in the market. You keep hearing whispers that new lenders are teetering round the edge. I think that’s what will help the funding side of things.”

The Council of Mortgage Lenders has predicted gross mortgage lending in 2009 will be around £145bn, a massive reduction on the £259bn seen in 2008 and £363bn in 2007. Laker says she’s seen little so far to dispute this figure, although Mortgage Intelligence saw a large increase in July.

“July seems to have been a month everyone found exciting as a substantial amount of business was coming through,” she says. “But we seem to be on a roller coaster as you have one fantastic month and then a not so good month. We’ve probably got the measure of things now and can’t do a lot to influence an increase in mortgage business but it feels as though there will be better things to come.”

The Financial Services Authority’s Mortgage Market Review is set to be unveiled in the coming months and the regulator has made it clear it is keeping an open mind regarding product regulation. So is this going to be the answer?

“A lot of the things that have been looked at is with a view to more regulation but the reality is that lenders have pretty much regulated products,” says Laker. “From a credit and risk point of view everyone’s pretty squeaky clean now. Obviously I appreciate things will change, but I think it will be quite a while before the current barriers are lifted.”

Part of the problem she says is that providers scrapped many inbuilt protections that used to be structured into loans.

“Products used to be linked to the SVR, so when borrowers came off their deal they were on the SVR which was a rate calculated by lenders,” she says. “I’ve often asked lenders how their SVR is worked out and they say it’s an exact science. Usually it starts at a certain point and lenders then add or subtract differentials - and I always liked that.”

“But over the years everyone started linking deals to the Bank of England base rate, never imagining that it might go down to 0.5% which is why you now have a substantial number of back books on 1.5%, or 2% which is hugely expensive to fund. If they’d all been on the SVR, a rate that can be dictated by lenders, that might have made a difference.”

She takes the same view on overhanging redemption penalties. They were originally structured into the loan to lock in clients after the original discount period. Once they were removed there was nothing to keep borrowers tied in and in a way she says, created the manic competition for new business between lenders that we saw at the height of the market.

“Borrowers could just run away so lenders needed to attract a lot more business in the front end, which meant they had to make rates cheaper,” she says.

“And then you get to a point then the rates are so cheap you’re not making any money. So then providers needed to open up the criteria a bit as new lenders can’t compete on price but can perhaps bring in a slightly different criteria.

“Looking back you can see how what’s happened was partly created by some factors being removed,” she adds. “I’m not saying it would have saved the world, but if some of those barriers had still been in play it wouldn’t have left lenders exposed.”

Stephen Knight, chief executive of Checkmate Mortgages and the former head of GMAC-RFC, recently revealed that when he eventually returns to lending he will be staying clear of self-cert and significant adverse. Will this be a pattern that we will see repeated with new and existing lenders giving a wide berth of specialist markets like self-cert?

“As a result of what’s happened over the past two years, credit and risk teams at lenders have a much stronger position and it’s going to take a long time before anyone is going to want to do any business that could put their firm at risk,” she says.

“And self-cert is now deemed risky because everyone will be looking at the profile of what’s created the biggest problems and the biggest arrears. In my view, and I’m not an expert on this, the only way that criteria might broaden is if there’s a lot more lenders coming in to bring in more competition.”

On the plus side she says she has had some positive conversations with mainstream lenders that are looking towards building up a pipeline for next year.

“I believe that mid-next year we will feel we are out of the worst and beginning to go in the right direction, but it’s difficult to gauge at the moment,” she says. “The events of last year are biting brokers. But those who have got their businesses in shape now will be strong.”

But she says that while it’s not always easy, for her part of the excitement of the mortgage industry is the way that things are constantly changing, with people coming up with new ways of doing things.

“In 10 years time the market will look incredibly different and that’s why people like me who have been in the industry for years find it exciting,” she adds.

And she argues that when the market does come back, everyone from brokers to networks and lenders will be in a stronger position.

“It’s when things are tough that people come up with the best ideas and there is always opportunity,” she says. “For example, for us it was the right time to put the two businesses together so we’ll be in a strong position.

“When things are going well we all end up with perhaps more people than we need and spending a bit more than we need. When you cut back it takes the fat out of the business, it make the business much leaner and stronger so when things get better you are in a really good position to drive forward with a slick business.”