All roads to recovery must begin with a first step and it is no different for the mortgage intermediary market.
Securing funds for mortgage lending is no mean feat in the current market but Exact founders Alan Cleary, Ian Lonergan, John Nixon and Sebastian Maloney have achieved what many are still trying to do and have launched a mortgage lender – Precise Mortgages.
Although they admit it will not fix the liquidity problem overnight, its launch into buy-to-let mortgages will aid the healing process. For many, it will not be the men in suits in the House of Commons who will rejuvenate the mortgage market but the innovative skills of those in the sector already.
The credit crunch has not only stifled new lending in the mortgage market, it has also put constraints on one of its most re-deeming qualities – its entrepre-neurial spirit.
It is almost 18 months since Cleary and his team secured funding to reform the assets of Edeus to create Exact.
Having learned their trade in the senior management team at HBOS and BM Solutions, Cleary and Nixon are well placed when it comes to knowing the ins and outs of the specialist lending sector.
Lonergan is also no stranger to the specialist market and was a key member of the GMAC-RFC senior management team during a period when the business doubled its annual origination volumes from £6bn to £12bn.
Every pound that we lend is a new pound that didn’t exist before we lent it. It is good for the market and helps borrowers
Maloney worked closely with Lonergan at GMAC-RFC and latterly held a senior role in structured finance and investments at Merrill Lynch.
Completing the senior management team is non-executive director Phil Jenks, who sits on both the Exact and Precise Mort-gages boards.
Once again the team has called on its exist-ing funder Elliott Associates, a large established investor, to enable its move into lending.
The sector has been awash with rumours of entrants pondering a move into mortgages for a long time, but Precise Mortgages has managed to keep its plans under wraps.
“I thought it would make a refreshing change to wait and announce our launch on the actual launch day,” says Cleary, managing director of Precise Mortgages.
So what makes Precise Mortgages different from other new entrants in the mortgage market?
“From a product perspective, most lenders are aiming for the same goal, which is all about good quality lending to customers, but the difference is that our funding is not based on retail deposits,” says Cleary.
He believes there are not enough retail deposits to fill the huge funding gap in the mortgage market as a result of the closure of the wholesale funding market.
The Council of Mortgage Lenders recently warned that mortgage lending could remain sub-dued for up to five years as lenders grapple with a £300bn funding gap. Speaking at the CML’s annual conference on funding affordable housing in London recently, Rob Thomas, senior policy adviser at the CML, highlighted the severity of the sums lenders have to pay back to the government and the Bank of England for access to funding over the next two years.
Thomas says that £178bn worth of funding accessed through the Special Liquidity Scheme falls due in 2011/12 while the £134bn from the Credit Guarantee Scheme is due in 2012/13.
“There is only a certain amount of retail deposits that exist in the UK,” says Cleary. “Lenders take a deposit from one lender then they lend that money again, there is no new money in the system.”
He believes this adds nothing to the market in terms of new lending and in some cases could even hinder the market’s recovery.
“The only way the mortgage market is going to return to growth is if you have lending from other sources, for example, capital markets and inward investments,” says Cleary.
He believes all new retail deposit-based banks do is increase competition.
“This is good from one point of view but that will drive up the cost of funds for everyone, which will push up the cost of borrowing in that sector as well,” he says.
When we write a loan, the right level of human intervention is hard-wired into the process. IT won’t make thefinal decision
He admits that Precise Mortgages is not going to solve the liquidity crisis but will pump a significant amount of cash into the market, which Cleary says will encourage other lenders to follow suit.
The mortgage market is £220bn smaller than it was in 2007 and in dire need of new lenders. “We are using new money from investors,” says Cleary. “Every pound we lend is a new pound that didn’t exist before we lent it, which is good for all of us. It is good for the market and helps borrowers and brokers.”
The buy-to-let market has been one of the worst hit areas of the mortgage market as a result of the credit crunch, but usually what is first to suffer is also first to recover. The sector is crying out for new lenders, with recent research from Datamonitor showing that just two lenders accounted for 80% of buy-to-let lending last year.
Its report, Buy-to-Let Mortgages And The Rental Sector, shows Lloyds Banking Group’s BM Solutions and Nationwide Building Society’s The Mortgage Works took the lion’s share of gross buy-to-let lending in 2009. Of the total £8.5bn gross buy-to-let lending advanced last year BM Solutions accounted for some £4.6bn while TMW lent about £2.3bn.
But with Kensington recently launching into the sector and The Mortgage Works increasing its LTV to 80% the market is starting to see the first signs of recovery. Specialist buy-to-let lender Paragon also posted a pre-tax profit of £29.3m for the six months to March 31 last week as the company continues to prepare to return to new lending. Pre-tax profits are up 84.3% compared to the same period last year when profits were £15.9m.
Paragon says the results have been driven by the strong performance of its £8.5bn buy-to-let book. John Heron, director of mortgages at Paragon, says it continues to prepare the business for the resumption of new lending. He says conditions in the wholesale funding markets continue to improve and discussions are pro-gressing with a number of parties to determine whether suitable financing arrangements can be agreed to support new lending.
But with Precise Mortgages’ management team’s past experience in the mortgage market it is unlikely its sights will be limited to just the buy-to-let sector.
“We are constantly reviewing our business model and looking for opportunities,” says Cleary. “But right now we are focusing on buy-to-let.”
Like all lenders in the mortgage market though this will be restricted by access to funding.
“We’re not going to solve the liquidity crisis by ourselves,” says Cleary. “We are hoping others may follow. We are looking for more funding from alternative funders to make our helping hand bigger over a period of time.”
Cleary says the team has successfully analysed £5bn of UK mortgages in the past three years.
“This has provided asset owners with an insight into the risks inherent within the mortgage portfolios post-credit crunch,” he adds.
The latest craze to hit the mortgage market has been complex prime, which lenders have created to cater for customers who have suffered from the ’computer says no’ syndrome, but Cleary says this has been misunderstood.
“Banks are not saying no because customers have a good or bad credit rating, they are saying no because they only have limited funding,” Cleary adds.
In terms of technology, instead of reinventing the wheel, Precise Mortgages will look to incorporate the best of both worlds – with the use of technology as well as human intervention. When Edeus launched into the mortgage lending market its focus was around technology and how this could transform the mortgage market, and Precise Mortgages will be no different. Its mortgage platform filters applications then passes them on to the under-writing team.
“Every time we write a loan, the right level of human intervention is hard-wired into the process,” says Cleary. “This will ensure that IT is used to keep underwriting efficient but it won’t make the final decision.”
Precise Mortgages is offering buy-to-let deals at 75% LTV. This includes a deal at LIBOR plus 5.25% for the life of the loan, with an initial rate of 5.89%, a fee of 3% and early repayment charges of 3% for 36 months.
It is also offering a two-year product at LIBOR plus 5.15%, with an initial rate of 5.79%, a 2.50% fee and 3% ERCs for 24 months, and a two-year LIBOR plus 5.35% deal, with an initial rate of 5.99%, a 2% fee and 3% ERCs for 24 months.
But for Cleary it is not about competition and going after market share but about quality of business.
“The buy-to-let market was worth £44bn in 2007 and is going to be at £8bn this year,” he says. “If you put another 50 lenders in the market we could all have a share and fulfil our lending targets.”
Precise Mortgages’ reliance on private funding and lack of retail deposits means it is restricted on how low its rates can go. Cleary says while it is not the cheapest in the market the products represent good value for borrowers, especially those who are struggling to get finance.
“No funding is limitless,” says Cleary. “We have lending capa-bilities in the hundreds of millions not billions, but as we find more funders and the market starts to look better that figure will improve.”
A typical target borrower for Precise Mortgages will be professionals with a minimum age of 30 who are looking to diversify their balance sheet by investing in property. Retirement planning or wealth management will be the overriding objective.
Cleary says applicants will not be property speculators or those looking to short-term investment to make a quick profit.
Applicants will have a good credit record with no adverse history and earn at least £50,000 a year.
Precise Mortgages’ distribution will be limited to Legal & General, Mortgage Intelligence, Mortgage Next and selected brokers but Cleary says this could expand as it launches into other sectors.
Another area where it is keeping its distribution restricted is its solicitor panel, which has just two firms on it.
“The reason we have chosen Goldsmiths Williams and Shoo-smiths is because after extensive due diligence we believe both these solicitors represented good value for money and give great service,” says Cleary.
He adds if a borrower decides to use another solicitor Precise Mortgages will have to agree that with the borrower and it will look to put it on its panel.
The lender is also playing it safe when it comes to valuations and has teamed up with Colleys, part of Lloyds Banking Group, for all its valuations.
Cleary is adamant that the firm will not impact existing Exact business and instead of being a hindrance, the two firms will complement each other. He says over the past two years it has been watching the market closely and has seen conditions change on the ground.
“We have developed a unique insight into mortgage credit risk post the credit crunch and the foundations of Precise Mortgages are built on this,” he says.
But he adds that the mortgage market should not expect anything controversial from the new lender.
“Precise Mortgages does what it says on the tin – it’s precise about its target market, precise about its credit risk and it will be cautious in its approach,” he says. “It’s a bit boring.”
With brokers suffering from dual pricing on a daily basis, Cleary’s intentions towards this sector are refreshing.
“We will not be doing any dual pricing, we love brokers,” he says. “The broker market is right for our business model as we don’t want branches and have no desire to do any direct lending.”
As Cleary freely admits, the launch of Precise Mortgages will not revolutionise the mortgage market but it will aid the market recovery. The revival of the mortgage market will not happen overnight, but if for every direct offering the intermediary sector can retaliate with its own offering it will have a strong chance of surviving and prospering.
“I’m hoping our launch will be viewed as a positive step for the industry. It’s good for borrowers and brokers and we are offering much-needed new liquidity to the market,” says Cleary.
It is a credit to the sector and brokers that a number of new entrants are shunning the direct route for the advised one.
The mortgage market may not ever return to the lending levels in 2007 but new entrants such as Precise Mortgages will go some way in returning the market to good health.