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Lehman ups the stakeslehman ups the stakes

Simon Hinshelwood and Bill Bilsborough are poised to take Lehman Brothers’ UK lending presence to a new level, says Rebecca AtkinsonSimon Hinshelwood and Bill Bilsborough are poised to take Lehman Brothers’ UK lending presence to a new level, says Rebecca Atkinson

Simon Hinshelwood and Bill Bilsborough are experienced professionals when it comes to the international mortgage market. Hinshelwood spent the first 13 years of his career in Sydney and in the UK at Arthur Andersen, before going back to Australia. He ended his 12 years there with a stint as chief operating officer and executive director of Aussie Home Loans, Australia’s largest non-bank lender.

On his return to the UK, Hinshelwood held the position of chief executive officer of Global Home Loans, a subsidiary of Countrywide Financial Corporate from June 2002 until joining Lehman Brothers earlier this year as managing director and chief operating officer.

Similarly, Bilsborough has split his 20-year career between the UK and abroad, having worked in Latin America, Europe and Asia.

He joined Lehman in May 2005 as managing director and chief executive officer of its European Mortgage Capital Division.

Lehman began its foray into the mortgage market several years before either Hinshelwood or Bilsborough joined the company. It bought Southern Pacific Mortgages Limited in 2002 and Preferred Mortgages in 2003. Its acquisition of London Mortgage Company was completed in March this year.

It has also launched into partnership lending with Alliance & Leicester, is in discussions about setting up a similar relationship with Northern Rock and is active in buying mortgage books from other lenders.

During the past four years it has gained a lot in terms of acquisitions and business relationships but with competition hotting up, tightening margins and fears of a housing market cool-down in 2007, what plans and ambitions does the investment bank have in the UK mortgage market?

Toni Moss, a partner at EuroCatalyst, explained at the Council of Mortgage Lenders’ second annual funding summit that investment banks started to take an interest in the UK mortgage market in the late 1990s when the sub-prime market started to surge, expanding the profit potential of securitisation. Although the most obvious opportunities were in the securitisation market, forward-thinking US investment banks such as Lehman quickly realised that by acquiring or setting up lenders they could originate loans themselves and take a greater share of the profit.

Bilsborough stands by Lehman’s decision to take on the UK mortgage market as calculated and well judged, and says it came after three or four years of strategic reviews.

He points out that the investment bank has been investing in mortgage bonds and portfolios for nearly 20 years and also has a strong presence in the American market where it makes both residential and commercial loans.

Since its initial foray into the mortgage market, Lehman has had its fair share of criticism. Some industry pundits have questioned the longterm commitment of investment banks in general and whether they would be prepared to ride out the bad times as well as the good.

But Bilsborough knocks such negative commentary on the head.

“We’re bullish and we have put our money where our mouth is,” he says. “This is not a pilot – we are here to stay.”

That may well be, but it is what happens now that matters. That will make the difference between long-term survival and getting flushed away.

One rumour that has repeatedly done the rounds is that Lehman will give up on its multi-brand strategy and merge Preferred, SPML and LMC into a super-lender.

This speculation has been strengthened by the investment bank’s efforts in the past year to merge the back offices of the three brands and move them into offices in central London, with some pundits predicting the economic benefits of a merger will overcome Lehman’ resolve to keep them separate.

Bilsborough is steadfast in his dismissal of any such plans.

“It is no secret that we have done significant work in the UK with our three brands in terms of optimising business delivery,” he says. “But the advantage of having three brands is that we can share best practice across them.”

Hinshelwood agrees. “During 2006 we combined our back offices but retained three separate front offices, three sales forces, three sets of products and three underwriting teams for each brands,” he says.

The importance of survival has been at the forefront of many lenders’ minds in recent years as the market becomes ever more saturated with entrants, each with a proposition designed to win a chunk of market share.

But there is only so much to go around so lenders must be innovative and progressive if they are to survive.

Stephen Knight, executive chairman of GMAC-RFC, has raised the issue of survival on several occasions, putting a lender’s success down to its willingness to embrace technology.

Knight believes point-of-sale offers using automated valuation models are the way forward, but with less than a handful of lenders offering this sort of technology, the industry is waiting to see to what extent it will take off and how it will shape the market.

Technology is integral to Lehman’s strategy, but as both Hinshelwood and Bilsborough are quick to point out it is not the be all and end all.

“Technology is important to everybody,” says Hinshelwood. “And it is as important today as it will be tomorrow. We see POS-O as something we would like to offer but it won’t be our sole proposition. It offers value to certain components of the market but not everyone will want it and we want to offer different propositions for different customers. It’s about customer choice.”

Hinshelwood’s refusal to get carried away by the opportunities offered by AVMs and POS-O is a reflection of Lehman’s level-headed approach to its UK mortgage businesses.

This year has been about settling down while in the year ahead it plans to implement a range of improvements including investing in a single technology platform to be integrated across its multiple proposition.

“Next year is about drawing value from the business which we pulled together in 2006,” says Hinshelwood.

As with many lenders, Lehman is turning its focus to distribution and the ways it can work with intermediaries to make the most of the market and its lenders’ attributes.

This includes deepening its relationships with the packager market, specifically using technology to integrate with key players and strengthening its on-site underwriting presence.

It also intends to expand its direct-to-broker proposition to service brokers who do not want to rely on using packagers.

Hinshelwood maintains there is room for both types of distribution, which Lehman will strive to satisfy.

“There are a number of lenders in this position, and while I can understand the point of view that this is cutting packagers out, we have long-term relationships with packagers and are committed to investing into this distribution,” he says.

“They must recognise that we are looking to draw brokers that aren’t doing business through packagers and try to support them.”

One of the more memorable headlines from 2006 was the announcement that Platform’s sales and marketing director Guy Batchelor was to join Lehman’s European Mortgage Capital Business as executive director responsible for franchise development.

Batchelor is on gardening leave until January 26 2007 and both he and his new employer have been tight-lipped about the role he will take on.

Although Hinshelwood won’t give details, he hints that Batchelor’s experience of working at an intermediary lender could stand him in good stead for working on expanding a direct-to-broker proposition.

He adds that Batchelor could play a vital role alongside himself, Bilsborough and director of sales and marketing of Lehman’ UK businesses John Prust in any future acquisitions it makes.

Another ambition for 2007 is establishing a Service Academy for employees from SPML, Preferred and LMC. This, according to Bilsborough, is about raising the bar within the group and ensuring service remains at the highest possible standard.

“We want to ensure we have understood what service means to our businesses,” says Hinshelwood.

“And continue to provide the best service in the market. We are making a significant investment in this because it is something we believe in.”

Lehman is keen to emphasise the importance of its staff to the business. The relocation of Preferred from Haywards Heath to central London sparked concerns of redundancy and dissatisfied staff. But through initiatives like the Service Academy, Lehman’s wants to move into 2007 as a united organisation.

“One key point is our focus on people,” says Hinshelwood. “We recognise the change we have put our staff through in 2006 and now we want to make sure that our brands are somewhere employees choose to work. It is a competitive market with poaching between firms rife, so we want to invest in developing values and a clear culture for our mortgage business in the UK.”

Lehman’s expectations for the future are broadly in line with that of the rest of the market. Market predictions tend to see house price inflation cooling off in 2007, with some fearing that the UK may follow the US in experiencing a house market crash.

So does Lehman expect a house market crash in 2007? Hinshelwood admits it subscribes to the view that the market will cool but doesn’t foresee a collapse ahead.

“Interest rates will tighten,” he says. “But I don’t think we’ll see house prices going negative.”

Hinshelwood is also confident about the sub-prime market, in which Lehman chiefly operates. He envisages continued growth in specialist lending over the next year although he foresees that this probably won’t be as steep as it has been in previous years.

The sub-prime market, in Hinshelwood’s mind, is all about supply and demand – as long as customers require sub-prime products which lenders continue to supply to them, the market will be driven onwards and upwards for the foreseeable future.

At this year’s CML funding summit there was a debate about whether investment banks lending in the sub-prime arena would turn to prime lending. Although it was generally agreed that tight margins in mainstream mortgages may make investment banks reluctant to take on the high street lenders, it was also felt that through their sheer size and funding streams, it would be an interesting battle which could see investment banks victorious.

But Hinshelwood doesn’t think prime lending is an avenue Lehman’s will be interested in taking.

“Investment banks have scale in a broad sense,” he says. “But in the prime mortgage market they are nowhere near the same level of prime lenders.”

Despite his reservations he says that Lehman’s never says never and if the economics made sense it could be something it would be interested in.

“We see an opportunity for us to grow best in the specialist sector,” he adds.

Hinshelwood thinks the sub-prime sector should take a leaf out of mainstream lenders’ books and focus on retention in the forthcoming months,

Retention policies have been a hot topic of late following HBOS brands Halifax and BM Solutions launching policies that include broker retention proc fees.

Critics of such schemes say they go against the ethos of Treating Customers Fairly and warn they will halve the remortgage market and kill off 25% of brokers.

“The question of whether it is treating customers fairly to pay these fees hinges on the advice the customer is given,” says Hinshelwood.

“Provided an adviser takes proper account of the individual customer’s situation and recommends a product suitable to that customer’s needs it should make no difference to the compliant nature of the advice if the lender in question is an existing lender and a proc fee is paid in the same way as it would be from a new lender.”

Although it could be argued that the tendency of most sub-prime lenders to securitise makes the importance of retention redundant, Hinshelwood believes the debate is just as relevant to the specialist mortgage markets.

“Acquisition costs are rising and so is customer churn,” he says. “Indeed it is to be expected that customers who go to a specialist lender due to a problem with their credit history are likely to seek a mortgage at a reduced rate once their credit history has been repaired.”

Hinshelwood predicts that retention issues will become increasingly relevant in 2007, with specialist lenders looking to structure both their products and their distribution relationships to focus more on retention.

He adds that it is definitely something Lehman’s will be looking to across its brands.

The securitisation market offers attractive rewards but these come with risks. Fitch Ratings recently warned that increasing competition and surging property prices are forcing sub-prime mortgage lenders to loosen their credit criteria.

There have also been whispers that relaxed underwriting criteria could cause agencies such as Fitch to downgrade originators’ assets, reducing their profit potential.

Hinshelwood attributes risk management as one of the secrets of Lehman’ success.

“We are focussed in risk lending,” he says. “And ensure that sound judgment is applied to the people we lend to.”

It demonstrated this in November when SPML followed in the footsteps of Preferred and ditched income multiples in favour of a debt to income ratio affordability calculation.

LMC is expected to roll out this method of calculating affordability “as soon as is practical”.

One big difference for Lehman in 2007 will be its willingness to have its name associated with the UK mortgage market and to be more transparent about its strategies and ambitions for its three brands – something it has not done in 2006.

Hinshelwood admits that its past silence has contributed to the widely held opinion that it is reluctant to be associated with the mortgage market.

“Although investors are aware that SPML, Preferred and LMC are owned by Lehman, we have been careful not to confuse people,” he says.

“We are proud to own and operate our businesses, and will be happy to be completely open in 2007.”

Lehman has big plans for its three brands and its UK presence. But will it be able to put the days of speculation behind it – and will the mortgage market be prepared to listen? limon Hinshelwood and Bill Bilsborough are experienced professionals when it comes to the international mortgage market. Hinshelwood spent the first 13 years of his career in Sydney and in the UK at Arthur Andersen, before going back to Australia. He ended his 12 years there with a stint as chief operating officer and executive director of Aussie Home Loans, Australia’s largest non-bank lender.

On his return to the UK, Hinshelwood held the position of chief executive officer of Global Home Loans, a subsidiary of Countrywide Financial Corporate from June 2002 until joining Lehman Brothers earlier this year as managing director and chief operating officer.

Similarly, Bilsborough has split his 20-year career between the UK and abroad, having worked in Latin America, Europe and Asia.

He joined Lehman in May 2005 as managing director and chief executive officer of its European Mortgage Capital Division.

Lehman began its foray into the mortgage market several years before either Hinshelwood or Bilsborough joined the company. It bought Southern Pacific Mortgages Limited in 2002 and Preferred Mortgages in 2003. Its acquisition of London Mortgage Company was completed in March this year.

It has also launched into partnership lending with Alliance & Leicester, is in discussions about setting up a similar relationship with Northern Rock and is active in buying mortgage books from other lenders.

During the past four years it has gained a lot in terms of acquisitions and business relationships but with competition hotting up, tightening margins and fears of a housing market cool-down in 2007, what plans and ambitions does the investment bank have in the UK mortgage market?

Toni Moss, a partner at EuroCatalyst, explained at the Council of Mortgage Lenders’ second annual funding summit that investment banks started to take an interest in the UK mortgage market in the late 1990s when the sub-prime market started to surge, expanding the profit potential of securitisation. Although the most obvious opportunities were in the securitisation market, forward-thinking US investment banks such as Lehman quickly realised that by acquiring or setting up lenders they could originate loans themselves and take a greater share of the profit.

Bilsborough stands by Lehman’s decision to take on the UK mortgage market as calculated and well judged, and says it came after three or four years of strategic reviews.

He points out that the investment bank has been investing in mortgage bonds and portfolios for nearly 20 years and also has a strong presence in the American market where it makes both residential and commercial loans.

Since its initial foray into the mortgage market, Lehman has had its fair share of criticism. Some industry pundits have questioned the longterm commitment of investment banks in general and whether they would be prepared to ride out the bad times SS

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