It is said that the hardest thing to do when you fall off your horse is to have the courage to get back in the saddle.
Alan Cleary, managing director of Precise Mortgages, knows this only too well in both his career and his extra curricular activities.
Cleary is a few hours away from qualifying as a light aircraft pilot after years of training near his home in the Midlands. Emergencies can happen, so his lessons include preparing for every eventuality – such as the plane spinning or diving or the engine cutting out.
“You have to switch the engines off and it goes deathly quiet,” says Cleary. “The first thing you have to do is try to get the engine back on but if you can’t do that you have to pick a field and fly into the wind.
“You have to call the emergency into air traffic control, descend at the right rate, switch all the electrics off in case of a fire, unlock the doors and then land in a field.”
It sounds scary enough, but Cleary has been involved in a real emergency where his life was in danger.
“We had a full scale emergency landing in one of my lessons,” he says. “The engine blew and the manifold separated from the fuel inlet meaning there was aviation fuel flying out of the engine. It was really dangerous.
“We had to make a full emergency landing and it was so serious that as we were landing fire engines were coming down the runway behind us. There was a danger it could have set on fire.”
After an experience like that it would have been easy to take a break from flying and move on to more placid pursuits but Cleary carried on with his lessons.
“You’ve got to get back on the horse so I’ve been back up and flown alone,” he says. “I’m just upgrading to a four-seater plane now but they are mainly two-seaters.”
Cleary’s decision to carry on after that crisis bears similarities to his career in the mortgage market. He set up specialist lender Edeus in 2006 but it was in administration by 2008 as the financial crisis wiped out wholesale funded lenders.
But Cleary didn’t let the setback deter him and immediately got back in the saddle by launching Precise Mortgages in the middle of the economic turmoil.
Precise then became one of a select few to gain authorisation for regulated mortgage contracts after the worst of the crisis.
Cleary began his career straight out of school in 1986 when he went to work for NatWest, moving to Birmingham Midshires five years later.
At the time it was a small Midlands building society with little national presence but it had an office in London’s Holborn and Cleary became manager there.
It was his first taste of mortgages and he underwrote and sold in branch, mainly to lawyers from the nearby barristers’ chambers.
He held various roles at the lender and was tasked with setting up a mortgage sales force for its branches.
In 1999 the society was demutualised and bought by Halifax. Realising that most of its business was similar to its new parent’s, the board decided to stop selling prime mortgages altogether and launched into the specialist sector and through intermediaries.
It rebranded to BM Solutions and as head of sales Cleary was charged with dismantling his branch operations and setting up a broker sales team.
In 2001 it held a joint launch party with Mortgage Strategy and began life in the specialist market from a standing start.
“We grew from zero,” says Cleary. “Having never done a specialist loan at all we were doing £12bn to £14bn in 2005 and were the biggest specialist lender in the country by a long way.”
Cleary was then moved to run Halifax’s intermediary operations. However, with a handful of others he soon left HBOS to set up his own lender, Edeus in 2006.
The timing could not have been worse as the mortgage market was on the precipice of a financial crisis. The model of wholesale funded specialist lender disappeared and Edeus entered administration just two years after being formed.
Out of the remnants Exact Mortgage Experts was formed as a third party servicer and mortgage analysis firm. Showing that Cleary had escaped relatively unscathed from the crisis, Precise Mortgages began life soon after, starting with buy-to-let lending.
Just as he had with his light aircraft, Cleary got straight back in the air. But this time he had to go through a lengthy authorisation process to get his lending licence.
Back in the cockpit
After a mass withdrawal of niche lenders the FSA is being more cautious about authorising lenders than it was before the crisis, as Portillion’s recently aborted attempt demonstrates.
Cleary says that because he had applied for permission to lend on regulated mortgages before, he was known to the regulator and it had seen him working in the mortgage market since it first became regulated in 2004. This helped his application, he believes.
“A clear difference post credit crunch is that the regulator wouldn’t authorise people simply because they applied,” he says.
“The market is fragile and the last thing the FSA wants to do is authorise a lender to find it doesn’t have funding or some other problem.”
The last thing the FSA wants to do is authorise a lender to find it doesn’t have funding or some other problem
Precise had to build its business completely before making its application to the FSA as the regulator demands to see a fully working business rather than a theory.
With its buy-to-let lending and mortgage analysis Precise could demonstrate that it was capable of managing risk in a post-crisis world.
“One of our core strengths was that even though we weren’t lending for a time we were using our systems to analyse mortgages,” says Cleary. “We had analysed more than £5bn of mortgages.
“We understand what the crisis has done to credit risk, which has put us in a good position.”
Cleary realised that even though Edeus went down he needed a presence in the market to attract future investment.
Precise’s systems to analyse credit risk and buy-to-let loan books via its servicing division Exact were key to proving its worth to sell homeowner mortgages.
Cleary, chief executive officer Ian Lonergan, and Phil Jenks, non-executive director of Precise, all had to undergo frank interviews at the FSA headquarters in Canary Wharf.
Cleary reckons the regulator is not necessarily more focussed on specialist lenders but is concerned with the funding lines they use.
“In the downturn all lenders funded by capital markets failed,” he says. “While it wasn’t the driver of the problem it wasn’t good that lenders were falling by the wayside. The FSA spoke to our funders to see how committed they were.”
One reason for the stream of non-bank failures was the short-term funding and use of 364-day warehouse facilities to fund loans. A mortgage had to be securitised and sold externally within a year or there would be no funding, so it was inherently fragile.
Precise has secured a long-term funding structure spread over 30 years, which Cleary says is difficult to obtain but reassured the FSA.
In fact, he says, the securitisation market is a medium-term aim for the lender and not something it is considering imminently.
“We always knew that when the securitisation market came back it would be for the likes of Santander and Lloyds Banking Group before it came back for someone like us,” he says.
“We always considered securitisation medium-term and still do but there are other ways to fund deals by keeping them on balance sheets.”
With its funding relatively secure in a tumultuous market, Precise had to choose the area it would most like to lend into and it has been constantly evolving.
As it began in buy-to-let its authorisation allowed Precise to move into near prime, while last year it saw opportunities in bridging loans.
All areas are a broadly similar size on Precise’s books but Cleary expects the share of bridging to shrink as it grows. This is simply because it is a smaller market not because it is lending less.
However, the boom in bridging is something Precise has shown itself eager to engage with over the last year.
It has made a number of appointments from other lenders – such as Roger Morris from Affirmative Finance and Tiuta’s Gareth Lewis.
From a business perspective Cleary believes the credit risk and margins make it attractive while funding is easier.
The nature of short-term lending is that after six to eight months you get the money back to lend out again alongside an average LTV of 50% to 55%.
“The quality of clients is exceptional because banks are retreating,” he says. “These clients still want funding but they simply can’t get it.
“Last month we did a £5.9m loan on a £12m house and that is not unusual – we get at least one of those a month. We’ve valued some spectacular properties.”
Cleary also believes bridging has an important role to play in solving Britain’s housing crisis and helping society.
He uses the example of a recent deal when a client renovated a derelict nursing home to build eight apartments.
“This person is taking something that isn’t being used at the moment and turning it into homes for first-time buyers and families,” he says.
“It’s good for the housing market generally and there is a significant need for this type of product so it really does make a difference.”
The use of bridging as a jack-of-all-trades for funding needs in the residential market has been a theme for some time now.
Whether it’s the classic bridge to make a quick purchase or investors left in the lurch by banks pulling their funding, bridging has proved a useful tool which has grown strongly in recent years.
Such growth has attracted the attention of the regulator however, which has issued numerous warnings about using bridging properly.
Currently certain types of bridging are regulated while those used for investments and buy-to-let loans, the key area of growth in the market, are not.
Cleary wants to see every loan regulated and already treats every loan as if it is, whether it is mandatory or not.
“We are simply applying the principles of regulation for our non-regulated business,” he says. “When we design a product we think about the customers and whether it meets their needs.”
Precise is now preferred bridging lender for a string of major networks after it approached them with its structures.
“We said to networks that they are a regulated entity and therefore they are running regulatory risk,” he says. “If bridging becomes regulated in the future then they will need to be working with a safe pair of hands and there has been broad agreement.”
Precise made its case by emphasising its policies on arrears handling and interest rate charging, and on the fact that regulation is on the horizon.
“If it’s a residential property then all loans secured against it should be regulated including second charge, bridging and buy-to-let,” he says. “The order I would do it in is bridging and then second charge followed by buy-to-let.
“Buy-to-let is a well behaved market with no major problems but if it is someone’s home then why should that person not be afforded the same protection just because it happens to be non-regulated?”
Lack of interest
One area facing regulatory and market upheaval right now is interest-only loans after an exodus of lenders from the sector.
Some have left it altogether but most have simply tightened criteria so far that it can only be a specific niche product.
Precise has made no changes to its criteria but Cleary says that just 10% of its business is interest-only and it is not chasing it.
The firm has robust repayment vehicles and does not accept house sale or inheritance, for example, as repayment methods.
The reasons for the criteria cuts appear to be a matter of dispute between the FSA and lenders.
Lenders claim the regulator’s actions have forced their hand while the FSA says it was being asked by lenders to go further and ban it.
Cleary argues that any such debate is academic and the changes are really down to funding issues.
“The simple fact is there is less money to lend and lenders need to pick where to lend it,” he says. “They are going to leave the outliers and come to the core. Interest-only is not core lending so lenders have moved away from it.
“Added to that the regulator has made its views clear about interest-only so if you are a big lender, once you start thinking about risk it’s an inevitable reaction.”
The interest-only spiral was sparked by Santander’s restrictions, quickly followed by Lloyds group, in a display of how the ambitions of the two biggest lenders have diminished.
The uncertainty in the global economy and the difficulty in obtaining well-priced funding have meant both are set on reducing their shares of the mortgage market.
Superficially this may present an opportunity to smaller lenders but the scale of the changes mean there is too much slack for them to pick it all up.
“The problem is the sheer size of Lloyds group,” says Cleary. “If it decides to do £6bn less lending then who can pick that up? It’s not going to be Precise or other smaller lenders.
“Ultimately the market will get smaller and none of them want to make their market bigger. There is a general acceptance that lending will be lower this year and will stay at this level for some time. You can’t replace the two biggest players as there are not enough other players of scale to plug that gap.”
While funding pressures are drastically reshaping the market they are being compounded by regulatory reform to store up capital against future shocks.
In tough conditions there is no let up from regulators to make the banking system safer and they are pushing through changes.
In the UK the Mortgage Market Review aims to beef up consumer protection and build a safer mortgage market.
When Precise launched most MMR proposals were published so it was able to set up a fully compliant lender. As such it is immune from any effects of the MMR jab hitting the market and expects to make virtually no changes when the rules are implemented.
For bigger lenders though changes could be huge, particularly over the proposal to ban non-advised mortgage sales. They have come out strongly against the idea and Cleary believes it is less to do with the cost of training advisers than regulatory risk.
“If it’s an execution-only sale then you can’t get punished for mis-selling so there is no regulatory risk,” he says. “Now it is an advised sale there is a risk and there is redress so that is the big cost and it is what banks will be scared of.
“The potential regulatory risks can’t be calculated, just look at payment protection insurance mis-selling and endowments.”
One attraction for Precise of outsourcing its sales entirely to brokers is that it does not carry any regulatory risk.
If other lenders follow a similar logic then compulsory advice could boost intermediaries.
“It is one of the beauties of using intermediaries because they are the ones authorised to give advice, they train under their own regime and if lenders tap into it they don’t have those costs or issues,” says Cleary.
“However the jury is out on whether that makes brokers more attractive overall. It could make lenders get rid of their mortgage advisers and go through intermediaries, but if they feel they have the risk anyway then they could decide to do it all in-house.”
Either way Cleary believes brokers will play a huge role in a recovering mortgage market and lenders will be thinking strategically about how they use them.
“The mortgage market could be £250bn in 10 years’ time and some lenders don’t have the capacity to do that amount of lending in-house so they use brokers,” he says.
“I’m sure all lenders will have a strategy to use or not use brokers in the future. We focus 100% on intermediaries because we think it works really well for us, they are a durable group of individuals and they do a good job.”
Last year Precise commissioned a YouGov poll to garner consumer views on brokers in a campaign promoting the sector.
It is doing the same again next month and believes brokers can benefit greatly if they sell their advantages direct to consumers.
“The problem for brokers at the moment is that the big six lenders dictate how much business they are going to do,” says Cleary. “It ebbs and flows with what Lloyds group feels like doing.
“Brokers should be saying to borrowers ’I can search the whole market and I can deal with issues much better than a branch-based mortgage adviser’.”
In its poll last year just 47% of consumers said they would use brokers but when told the benefits the number shot up to 90%.
“Clearly there is an education gap and if we can educate consumers then they can go straight to brokers,” says Cleary. “Brokers can then go to lenders and say these are my customers and this is how much lending I want to do.”
Such consumer education coupled with promotional campaigns is one way that brokers can fight back against pushy lenders.
Indeed Cleary is advocating to brokers the same approach that he has to life – when you go through a crisis the best thing to do is to learn from it and keep on flying.
Born: London in 1969
Education: St Gregory’s RC, Kenton, Middlesex
1986-1991: NatWest various roles in retail branch in London’s West End
1991-1997: Birmingham Midshires – various roles from branch manager to area manager, northern divisional manager and head of specialist lending
1997-1999: Birmingham Midshires – regional manager
1999-2002: Birmingham Midshires – head of retail mortgages
2002-2004: BM Solutions – head of sales (intermediary mortgages)
2004-2006: Halifax – director of Halifax intermediaries
2006-2008: Edeus – managing director
2008 to present: managing director of Precise Mortgages and Exact Mortgage Experts
Hobbies: Flying light aircraft
Favourite film: Rainman
Mortgage: Lifetime tracker 0.58% over base rate