Ambitious targets

8 March 2010

There’s a long list of potential lenders waiting to enter the mortgage market and the lack of access to mortgage funding means the industry is keeping a close eye on every development.

A number of would-be lenders have hit the headlines in recent months, some spurred into action by the fire sale of branches by the Royal Bank of Scotland and Lloyds Banking Group. Names in the frame include Virgin Money, Tesco Personal Finance, Metro Bank, Walton & Co and of course Portillion, recently rebranded from Checkmate Mortgages.

There have also been rumblings about some players making a comeback such as Mortgages PLC and Kensington Mortgages. All this speculation adds up to a lot of hype but no concrete plans for launching a mortgage lender.

But behind the scenes a bank called Aldermore has been quietly drawing up plans to enter the residential mortgage market. In January Aldermore announced it had recruited Colin Snowdon, former chief executive of Merrill Lynch subsidiary Wave, to investigate the possible launch of an intermediary mortgage lender.

Richard Spinks, who worked with Snowdon at Wave as director of product development and credit, has also made the move to the relatively unknown lender to become its commercial operations director of residential mortgages.

Now, with the necessary permissions from the Financial Services Authority in hand the Aldermore board has agreed that the bank will enter the mortgage market before the end of June. What’s more, Aldermore plans to distribute its mortgages solely through brokers, with no plans to offer them direct.

Snowdon, now settled in his role as chief executive of residential mortgages at Aldermore, is undaunted by the other new entrants said to be snapping at his heels.

“It’s great that there is so much interest in getting into the market, as it needs more supply and diversity,” he says. “Some of these banks are talking about having branches and getting customers in that way, so I don’t see them as a threat.

“The difference with our approach is that I’m a firm believer in keeping your powder dry about what you’re going to do at some indeterminate time in the future. I prefer the approach of keeping it to yourself, working up plans and then telling the market when you’re ready to go.”

He certainly hasn’t wasted any time in getting the lender together. The launch of Aldermore as a lender dates back to last May when private equity firm AnaCap Financial Partners bought Ruffler Bank from shareholders for an undisclosed sum. This was the first time the FSA had approved the sale of a British bank to a private equity company.

We are not talking about tens of millions of lending in the first year -we are talking more about hundreds of millions

Ruffler, founded in 1969, offered retail deposits and finance to small and medium-sized businesses, and as of March 31 2008 had a loan book of £56.8m and deposits of £55m. AnaCap merged Ruffler with Base Commercial Mortgages and Aldermore was born.

Meanwhile, Snowdon left Wave in October 2008 following parent Merrill Lynch’s decision to stop new lending via Wave in May that year. When AnaCap announced it had bought Ruffler, Snowdon saw an opportunity and approached the company with a lender blueprint. He joined the company in November and Spinks came on board in December.

“The blueprint acknowledged the need for retail funding and did not depend on securitisation or the capital markets,” says Snowdon. “We don’t rule that out for the future but you can’t build a mortgage lending operation at the moment unless you’ve got access to retail deposits.

“It also stated that the company was not going to be a sub-prime lender. We are going to be a prime lender in the residential and buy-to-let markets.

“The other thing the plan acknowledged was the importance of the broker market,” he adds. “So we have no plans to take mortgages direct to the public or open branches - we are an intermediary player.”

Snowdon says Aldermore already has arrangements in place with some big distribution outfits including clubs and networks, but has no plans to distribute via larger brokerages at the moment.

“We won’t be opening our doors to all intermediaries initially, but equally we won’t be favouring either appointed representatives or directly authorised brokers,” he says. “We’re talking about thousands of firms rather than a handful. Our plan is to start small but we’re not talking about tens of millions of lending in the first year - we’re talking hundreds of millions. It’s not our practice to give out figures but our targets are ambitious.”

Snowdon admits the decision to enter the mortgage market via brokers only is partly based on the difficulty and cost of opening branches and marketing directly to consumers. But he says brokers also represent the quickest route to market for lenders.

“We know that if you do it properly you can get good quality business from brokers,” says Snowdon. “I feel that intermediaries are being unfairly blamed for many of the issues surrounding the recession and the credit crunch. Of course, there are bad brokers just as there are bad lenders. But if you know what you’re doing as a lender you can pick your way through the market and find plenty of highquality business.”

Snowdon has faced the challenges of setting up a lender three times before, and on two of those occasions Spinks was alongside him.

Snowdon set up The Mortgage Business for what was then Bank of Scotland in 1989 before joining Britannia Building Society in 1997 and launching specialist prime lender Verso for the mutual in 1998.

He then went on to become managing director of Freedom Lending in 2003 and stayed at the helm for both the Merrill Lynch buyout in 2006 and the rebrand to Wave the following year.

It’s a somewhat different career path from the one Snowdon originally mapped out for himself. After studying medieval and modern history at Birmingham University and aspiring to become a history lecturer, he instead joined Lloyds TSB’s graduate scheme and then moved to Leicester Building Society. In 1985 he went to National Home Loans, the first UK lender to be funded by wholesale funding.

Spinks has nearly 20 years’ experience in the financial services industry, much of it spent at the former Britannia - now part of The Co-operative Bank. He started his career as a production controller at a plastics engineering company before a family friend helped him get a job as a customer service adviser in the Sheffield branch of Britannia in 1992.

Spinks rapidly progressed to become a mortgage underwriter in 1994 at the society’s centralised mortgage centre in Huddersfield. This was followed by a credit analyst role in Britannia’s credit scoring department at its head office in Leek before he became manager of credit quality at Verso in 2000 where he met Snowdon.

When Verso merged with Britannia subsidiary Platform Home Loans, Spinks became product and credit manager before joining Snowdon in the launch of Wave.

Snowdon and Spinks aren’t the only ones at Aldermore who have worked together before. The mortgage arm of the lender is practically a reincarnation of the Wave team. Its office in Wilmslow is staffed by 25 employees, 21 of whom are ex-Wave. They’ve all quit their jobs to work at Aldermore so they must have faith that it will be a success.

As to its strategy, Aldermore is pitching itself as a prime residential mortgage lender, although not necessarily the squeaky-clean definition of prime that has become accepted of late. The plan is to cater to creditworthy borrowers who may not be able to pass a credit score but who can still prove they can afford a mortgage.

“There are three ’buckets’ borrowers will fall into,” says Spinks. “There will be clear declines who don’t meet our criteria and there will be clear acceptances. Then there will be a grey bucketful of borrowers who sit in the middle - principally those who would fail lender credit scores.”

Spinks explains that a number of situations that result in borrowers failing credit scores may not be down to adverse credit. A failed credit score could be attributed to a new job or a borrower renting. Alternatively, they might be self-employed.

“All these things make it hard for consumers to get mortgages,” he says. “In our grey bucket we will employ underwriters, look at cases on their merits and approve the right ones. This will open up mortgage funding to customers who wouldn’t otherwise have access to it.”

Making brokers aware there is a lender available to place this kind of business with while sticking to its prime ethos will be one of Aldermore’s biggest challenges, says Snowdon.

He says that prior to the financial crisis, and perhaps even now, brokers would take the tried-and-tested route of applying to one mainstream lender, having their case rejected and trying another before passing the application to a packager through which the case would ultimately end up with a specialist lender.

“Those specialist lenders have largely gone,” he says. “And sadly, the packaging community is operating at nowhere near the scale it once was. Brokers are going to have to educate themselves about what to do with customers who are creditworthy but who don’t fit mainstream lenders’ credit scores.

“I think we’ve got some educating to do among our distributors so brokers realise there is a home for these customers, but they’re going to have to work at it.”

Aldermore will also offer buy-to-let mortgages, and plans to start by lending on single buy-to-let deals rather than portfolios. It is targeting experienced landlords as opposed to professional ones - a phrase Snowdon takes issue with. He believes the term ’professional landlord’ tends to mean an investor with a lot of properties, but that quantity is no measure of success, as the recession has proved.

“We’re going for experienced landlords who can prove they’ve got at least one buy-to-let property that’s working,” he says. “So we mean professional in their approach rather the number of properties they’ve got.”

The plans to extend the FSA’s scope to buy-to-let regulation, as mooted by the Treasury and in the regulator’s Mortgage Market Review, may need to be looked at again, argues Snowdon.

“If regulation is needed at all it’s for the investment decision, not the mortgage lending transaction,” he says.

Nevertheless, Aldermore has approached the buy-to-let market as if it was already regulated. The lender will deal only with FSA-authorised brokers and will treat both loans and customers as if these mortgages were residential transactions.

Snowdon and Spinks agreed at the outset that self-cert and fast-track - which are also under attack in the MMR proposals - won’t be on offer as they don’t comply with the bank’s core prime strategy.

“Fast-track could be interesting to look at once we’ve accumulated some data,” says Spinks. “But it doesn’t really sit with how we intend to individually underwrite borrowers. We plan to underwrite the loans that are clear acceptances to ensure the decisions our system makes are correct.

“Borrowers will either be clearly out because they don’t comply with our policy or they could be compliant with all our rules but still need to be underwritten by humans.”

High LTVs is another part of the market that Aldermore does not want to target.

“It wouldn’t be right for a relatively new bank with ambitious plans to grow its balance sheet to do all its lending, or even a proportion of it, in high LTV bands,” says Snowdon.

The two men at the helm of Aldermore’s mortgage business have seen the dangers of straying too far from a balanced, considered approach to lending at close hand. As Wave was wound down Snowdon and Spinks could only watch as the realisation dawned on Merrill Lynch that the funding tap made available through the use of securitisation and loan book sales had been unceremoniously turned off. Snowdon says they would be foolish not to consider a diversified funding model, but he does not anticipate a return to the widespread use of securitisation as seen before 2007.

“There always was a small amount of portfolio trading and from the mid-2000s this grew, fuelled by GMAC-RFC,” he says. “I can’t see it coming back on that sort of scale. The philosophy of ’create and trade’ is finished for now. While it might come back, it is unlikely to be on the same scale again because the regulator simply won’t allow it.”

The outlook for mortgage lending isn’t great, with the Council of Mortgage Lenders stating that gross lending for 2009 was just £143.7bn and predicting that this year will be at a similar level.

Spinks admits he sometimes has moments in which he worries that Aldermore’s ambitious targets will be missed, but overall the pair are dismissive of suggestions that this is a tough time to launch a mortgage lender.

Snowdon argues that a lot of the problems lenders are facing at the moment can be put down to legacy issues. The maths of having borrowers on low tracker deals, making minimal payments while paying a high cost of funding, don’t add up, he says.

There are also serious funding implications for lenders that have participated in the Bank of England’s Special Liquidity Scheme and Credit Guarantee Scheme, as repayments are due over the next three years.

“Many organisations are heavily into the SLS,” says Snowdon. “They’ve borrowed money and Bank governor Mervyn King has made it clear he wants it back in 2012.

“So those banks are planning ahead and looking at the size of their balance sheets, knowing they are going to have to pay back tens or hundreds of millions. They have to think carefully about how quickly they can grow their balance sheets. Being a new lender, with access to retail deposits and no baggage from the past, means we are in a strong position.”

It’s a tricky balancing act that Aldermore is looking to pull off - an aggressive lending target of hundreds of millions in its first year of trading but a considered underwriting strategy behind it. Of course, those at Aldermore have the advantage of having been through the mill before and have the experience to know what works and what doesn’t. Combine that with a clean slate backed by retail deposits, and perhaps those ambitious targets aren’t so far out of reach after all.