Foundation Home Loans is just one year old but its roots pre-date the credit crunch. Given the Chancellor’s recent attack on buy-to-let, what do FHL’s bosses think lies ahead for both the firm and the sector?
Foundation Home Loans had hardly opened its doors last year when the Chancellor delivered his first blow to the buy-to-let sector, announcing in his summer Budget that tax relief for landlords was to be slashed.
One year on and, after George Osborne’s second major strike against buy-to-let in the form of higher stamp duty for second homes, FHL nevertheless remains fiercely optimistic about its future and that of the private rented sector.
The lender launched in February 2015 with a buy-to-let proposition targeting landlords with relatively small portfolios – between one and four properties – and allowing light adverse borrowers. A first-time landlord offering followed soon afterwards in April.
A few months later, in October, the lender launched a limited company solution, just in time for December’s Autumn Statement that included the stamp duty announcement, which looks set to make this kind of purchasing structure for investment properties much more mainstream as landlords seek to avoid paying the 3 percentage point surcharge when expanding their portfolios.
“What a sliding tackle from George Osborne to the industry that was,” says FHL chief executive Hans Geberbauer.
“Just as we were rolling on the pitch, still complaining to the ref, he had another go at us. People did not anticipate it and they did not anticipate the second strike. He really wrong-footed the industry.”
Despite this, however, Geberbauer says it has been “an exciting year” and the timing of FHL’s limited company option for landlords could not have been better.
FHL may be considered one of the new ‘challenger’ lenders but its roots go back to before the credit crisis, when GMAC-RFC was one of the big players in the sub-prime and specialist lending market.
Geberbauer’s career with the business spans that entire timeframe. He qualified as a lawyer and joined Allen & Overy in 1998, moving into the securitisation department in 1999 to focus on residential mortgage-backed securities.
In 2002 he moved on to work for a client, GMAC ResCap, running the legal function for the international business, which was basically everything outside its US operations. The UK was the biggest part of the company’s global footprint, which also included Germany, Mexico, the Netherlands, Spain and even, briefly, Australia.
In 2008, however, when the financial crisis was in full swing, GMAC – best known across the pond as a car finance provider – had to be bailed out by the US Treasury.
“The US did that to protect the availability of auto finance primarily to US consumers and indirectly to US car manufacturers,” says Geberbauer. “It was quite keen to make sure that the bailout didn’t somehow benefit European mortgage exposure.”
Following the bailout, Geberbauer’s job became one of crisis management as he helped reshape the business after the shock of the credit crunch.
He says: “I left the legal department in 2009 to become a general manager of the GMAC businesses as we were dealing with the crisis, which then turned primarily into an exercise in extracting GMAC from its European mortgage footprint through sales.”
UK borrowers experienced this period as a sudden tightening of mortgage availability as GMAC, along with many of its competitors, closed its doors to new lending. Suddenly, from being able to borrow more than the value of their property with no deposit, or to qualify for a mortgage with no proof of income and a patchy credit history, many homebuyers and remortgagors found they had nowhere to turn.
Life was not rosy for the broker market either. Many advisers and packagers went bust during this period as lending volumes plummeted.
Geberbauer worked on the sale of the Dutch, German and Spanish businesses. He recalls: “The US Treasury was keen that GMAC exited these businesses, so we put them up for sale. We started in Spain, which was a standalone transaction.
“We looked to sell the remaining businesses as a package, with loan assets that were sitting off the balance sheet in various special-purpose vehicles in a single transaction, which we succeeded in doing with Fortress in 2010.”
At this point, Geberbauer followed the mortgage assets and moved to Fortress, which set up Paratus AMC and then FHL.
He says: “This company is entirely standalone, owned by funds managed by Fortress Investment Group, so we don’t have a corporate parent in the traditional sense. We are owned by these investors and these funds. We changed the name to Paratus AMC in early 2011.”
Return to market
As the storm clouds cleared, thoughts turned to how Paratus, the group’s servicing arm, could return to new business in the UK. Rather than simply managing its legacy mortgage assets, servicing other companies’ mortgage books seemed an obvious avenue.
Geberbauer says: “We investigated other servicing opportunities but I think the connection with Fortress was [somewhat] unhelpful because, often, those servicing opportunities would arise for competitors – i.e. other buyers of loan assets – and that’s a difficult sell. We found in the end that, strategically, it just wasn’t going to work.”
But time was on the company’s side. Geberbauer adds: “In the meantime, of course, we observed the market coming back; a significant recovery in house prices.
“We tallied up what we were good at, what resources we still had and how the existing infrastructure could be made to support more than just a very effective legacy servicing proposition. We felt that the step back into lending would be fairly straightforward and would take advantage of the existing infrastructure.”
While there was much that required rebuilding, there was also a lot of existing capability for the new lender, FHL, to draw upon.
Geberbauer says: “We have an extremely mature risk and compliance monitoring function, which is incredibly important in this heavily regulated environment – even if you are a buy-to-let lender, which is an unregulated product. We don’t have to build that from scratch.
“We have settled post-completion systems, loan accounting systems and a probably industry-leading arrears management system already built.”
The excesses of the boom years and the sub-sequent credit crunch have cast a long shadow over the mortgage industry. Lenders of that era, both here and in the US, share a collective responsibility for the impact on borrowers who became over-indebted.
However, the team at FHL is keen to learn from the industry’s mistakes and turn its past experience into a positive differentiator.
Geberbauer says: “Anybody who enters new into lending doesn’t do it with a view to managing arrears but eventually they will have to manage some arrears – that’s natural. It’s not necessarily a function of bad underwriting; it’s just what will happen as a book ages.
“All of these entrants will have to start thinking about when to hire the first people and what to do until the first arrears arises. We don’t have that problem. We still have some historic arrears that we are actively managing, so we still have a lot of that capability and we can leverage it.”
In September 2015 Simon Bayley joined FHL as commercial director, moving from GE Money Home Lending where he had held the same position.
By this point the new lender had launched a ‘vanilla’ buy-to-let range, quickly followed by first-time landlord and limited company options. Bayley’s brief was to oversee the strategic development of the various business channels in which FHL operated, as well as identify other opportunities for the company. His first major task was to simplify the pricing.
He says: “We did a lot of work in December to review the rate card because, as soon as you add products, it starts to get complicated. We then tidied everything up so that our prime products were exactly the same as light adverse outside of criteria. We also made our limited company products the same as our prime products. We don’t price differentiate between the two.”
Bayley had begun his financial services career at Welcome Finance in 1995, moving on to The Associates before joining First National (which later became GE Money) in 1998. Starting as a sales representative, he progressed upwards via a number of different roles.
In 2006 Bayley moved into mortgage lending, taking on a strategic sales role that included managing a business specialising in sterling mortgages for holiday homes in Florida. In 2008 he became sales director at GE Money Hong Kong, before moving into the role of chief operating officer.
On returning to the UK in 2010, Bayley oversaw risk operations covering originations, asset management and valuations. Next he became strategic director for Europe before returning to a UK mortgage focus as commercial director in 2013.
Limited company lending
Like many in the industry, Bayley expects the Chancellor’s changes to the taxation of buy-to-let to cause a fundamental shift towards limited company lending.
“We launched [the limited company option] in October and, when we started, 3 per cent of our decisions in principle were on limited companies. In December the figure was over 20 per cent and in January it was around 60 per cent. It’s a significant ramp-up.”
So where are these volumes likely to settle once the buy-to-let changes have bedded in?
Bayley says: “It will be somewhere north of 80 per cent but there will always be 10 per cent or so who won’t go down that route.”
For landlords who are still in the process of making the difficult decision around the ownership structure of their property, FHL provides the option to finalise this at a later date.
“So you could come to us and do a Dip as an individual, go and see an accountant who suggests that actually a limited company would be best for you and we will then change that to an LLC as long as it’s before the offer stage.
“It allows us to offer something slightly different and those are the types of thing we are increasingly looking at – how we can be easier to do business with,” says Bayley.
FHL is also contemplating how best to service the self-employed and contractor market.
Bayley says: “Some lenders have gone quite heavily into that. Kensington is one that has really pushed its self-employed proposition. As a specialist lender, we should definitely have this on our list of things to look at.”
Geberbauer continues: “There are a lot of opportunities. Affordability looms very large in owner-occupied lending, not least as a result of the regulatory pressures, which has in part led the market to become extremely conservative.
From the regulatory perspective, what is probably an unintended consequence is that some people are finding it extremely difficult to access the market even as the employment market is changing. Fewer people have lifetime jobs.
“There is opportunity in the way one can look at affordability and verify it without sending trucks of paperwork up and down the motorways.”
Geberbauer thinks technology is the answer. He says: “The digital age affords opportunities to get a very good picture of what people have, what they spend and how they behave, quickly and actually fairly cheaply. That is one of the significant themes we are investigating around where the product is going to sit to allow us differentiation.”
There is no doubt that regulation has brought plenty of challenges to the mortgage market in general and the buy-to-let sector in particular.
One example is the EU’s Mortgage Credit Directive and its regulation of so-called consumer buy-to-let.
Geberbauer explains: “What the MCD is looking at and where you get much closer to the perimeter is the ‘accidental landlord’.
“This is not someone who sits down and thinks ‘I’m going to make an investment with a view to capital growth and income and this is a great line of business for me to be in to quit my day job.’ It is someone, for example, who says ‘I inherited a property from my parents and now I’m going to get a mortgage on it and rent it out’.”
Geberbauer does not believe the forthcoming changes will necessarily be helpful to consumers.
He says: “Where it gets really interesting is where people have family changes – people moving out after divorce where there is a second property, or people moving in together. There is now a significant penalty, after forming a joint household, to holding on to the other property.
“It’s kind of odd as a lot of people do that and retain one as an investment, which makes perfect sense. It is actually very good practice because it is a great way of saving for a pension but the Government has just made it very questionable.
“We think clearly these were unintended consequences but the tinkering is really going to affect a lot of people’s quite legitimate plans, not least around how they live their family lives. It is probably not going to affect lending numbers in a big way but it is very unhelpful.”
Another area that troubles some in the buy-to-let industry is the move towards stress tests. But FHL approves of the direction in which policymakers are heading.
Geberbauer says: “The rules are still being discussed and finalised, including whether the Financial Policy Committee will take measures that it is now entitled to do – albeit it’s not 100 per cent clear how they will affect different lenders and different regimes, so the jury is still out.”
He adds: “We think some action around it would not be a bad thing because we take quite a conservative view on this. We think it underlines the emphasis on affordability.
“We are seeing some interesting approaches that we think are quite aggressive, which the FPC may wipe out. We don’t want another race to the bottom in terms of criteria.”
Geberbauer has formed the impression that some lenders are not stress testing buy-to-let loans at all. He says: “We are not sure what the logic is. There may be some but it is not at all apparent.”
Brokers will no doubt recall a time when FHL’s ancestor, GMAC, was not known for being the conservative voice in the market, yet Geberbauer says: “The intermediary market has been quite supportive.”
He adds: “I think even over the short period of a year nobody who knows that this comes from a GMAC base would suggest it is anything but totally different.
“There is also a second part of this that’s worth emphasising. The GMAC book, specifically the non-conforming book, broadly speaking has significantly outperformed its peers.”
This is according to the ratings of mortgages originated by GMAC that are tracked by Fitch.
He continues: “What you see within that is that the GMAC deals significantly outperform those of competitors, both in terms of the arrears performance and, very importantly, in terms of the repossession frequency. This is significantly lower than that of almost all our competitors.
The differences are actually quite stark.
“On one level GMAC was sort of a victim of its own marketing, wanting to come across as very aggressive, but that’s not really borne out by the numbers.”
Now, however, FHL is focused clearly on the future. Geberbauer says: “The key focus is to continue rolling out new business. The critical addition will be an owner-occupied proposition in the course of this year.
“It’s a journey, and there is quite a way to go to get to offering the experience that we intend to offer our distribution partners. That really is the main focus.
“We are looking at lots of things in our five-year plan but we will not be distracted from that core. It’s going to be the main focus for this year.”
CV – Hans Geberbauer, chief executive
Born/education 1971/University of York & College of Law
1998 Allen & Overy, London
2002 Chief counsel, GMAC ResCap
2009 Managing director, strategic operations, GMAC ResCap
2010 Co-chief operating officer, Paratus AMC
2014 Chief executive, Paratus AMC
2015 Launched Foundation Home Loans as chief executive
Hobbies Running, cycling, triathlon
Favourite film The Ghost Writer
Favourite book Spike Milligan’s war memoirs
Favourite band Red Hot Chilli Peppers
Mortgage First Direct offset
Most significant achievement Turned around the performance of the GMAC securitisations
CV – Simon Bayley, commercial director
Born/education 1972/Manchester Metropolitan University, Staffordshire University
1994 Quality, purchase and production manager, Scandinavian Mobility
1995 Graduate scheme, Welcome Finance
1997 Senior assistant branch manager, The Associates
1998 National account manager, First National Bank (bought by GE Money)
2006 Sales leader, GE Money Home Lending
2008 Sales director, GE Money Hong Kong
2009 Chief operating officer, GE Money Hong Kong
2010 Risk operations leader, GE Money Home Lending
2012 Strategy director, GE Capital EMEA
2013 Commercial director, GE Money Home Lending
2015–present Commercial director, Paratus AMC/Foundation Home Loans
Hobbies Running, cycling, skiing, watching Manchester United
Favourite film Bucket List
Favourite book Art of War by Sun Tzu
Favourite band Queen
Mortgage HSBC lifetime tracker
Most significant achievement
Challenged the status quo in auto lending in Hong Kong and delivered pricing control back to the lenders across the industry