You went live with your new mortgage lending business at the end of May. That’s quite a notable event these days so can you tell me a little about the business, where it fits into the overall market and how the venture came about?
CS: I suppose Aldermore is the new kid on the block in terms of the banking scene. It is a retail-funded deposit-taking lender with a simple proposition. It has been lending in what can be best described as the small and medium-sized enterprise space, offering commercial mortgages, asset finance and invoice discounting. The residential mortgage arm is an addition to that proposition.
JM: Still, Aldermore itself is a pretty new name for most of us and I’ve heard it has quite an interesting history. Can you talk about that?
CS: Well, once there was a lender called Ruffler Bank. This was a small, family-owned British bank that was retail-funded and its lending was largely in the coin-operated asset finance industry, so we’re talking about fairground equipment. Yes, what you might call a niche market.
Anyway, Ruffler was bought by AnaCap, a private equity company, last May. This was the first time the Financial Services Authority had given change of control permission to a private equity company.
We are not using credit scoring – our approach is rules-driven and the most important thing is that we have trained and experienced underwriters at the heart of our proposition
Before that, AnaCap already owned Base Commercial Mortgages which had been launched just before the credit crunch in January 2007. It had gone into hibernation because of the crunch so when business at Ruffler was quiet the name was changed to Aldermore and Base Commercial was reversed into the bank to expand its product offering.
Base Commercial was located in Peterborough so Aldermore moved its operations there to become the main hub.
Then it set out to increase its product offering so AnaCap and the board of the bank were looking for opportunities in new markets.
The company did a piece of work on residential mortgages and realised there was a significant opportunity for a liquid organisation because of market dislocation on the funding side of things.
I’d been talking to Aldermore for some time and joined the bank last November to look into where we should be positioned in the market.
Now, our venture is based in Wilmslow rather than Peterborough and what I’ve basically done is bring back together the team that was in place at my previous lender, Wave. So there are 35 of us in Wilmslow and 27 of those are ex-Wave.
Anyway, regarding the management structure I am chief executive, residential mortgages – not chief executive of the bank and I’d like to make that clear. I report to Phillip Monks who is chief executive of Aldermore.
My number two is Richard Spinks, the commercial and operations director. We’ve worked together for a long time.
JM: And what about your place in the market? Are you planning to look at non-conforming lending again?
CS: No, we’re a pretty straightforward prime lender focussed on residential mortgages and buy-to-let deals. But our proposition is a little different from the norm. It seems to me that what’s happening with big lenders is that they are controlling inflow, or rationing their business through credit scoring. In fact, some are moving their scores up and down on a weekly basis – or that’s the message I’m getting from brokers anyway.
We are not using credit scoring – our approach is rules-driven. The crucial thing is that we have trained and experienced underwriters at the heart of our proposition.
JM: That prompts my next question. You’ve got an interesting product proposition – a prime lending product for borrowers who might fall short of standard credit scoring methods because, say, they haven’t been in a job for long or haven’t got much of a credit history. That seems to me to be a fairly subtle proposition to put across. Is that what you are finding?
CS: I suppose it is tricky, and maybe the best way I can answer you is by giving an example. We recently had a mortgage application from a lady who had a £30 County Court Judgment that was satisfied five years ago and she’d been turned down by a couple of major lenders simply because she failed their credit scores. That’s the kind of customer we’re looking to attract.
But one of the big benefits of our proposition is that we’ve got some seriously good technology on the case. A broker can input an application in his office which will take about 10 minutes, and he’ll get either a yes, a no or a refer. We’re not interested in fighting battles over the declines.
The great thing is that brokers don’t get slow declines but a quick ones, so at least they know where they stand.
JM: And is access to your products through normal mortgage sourcing tools?
CS: Yes. Prior to launch we tested the system and the proposition with brokers in a small way for about a month and feedback was excellent.
JM: The old non-conforming or specialist lending market was predicated on pricing for risk but that went out of the window when competition became too intense. Do you see an opportunity to return to risk-based pricing with your new model, given that you’re offering loans to home buyers who may have been turned down by other lenders?
CS: It would be crazy for us to take on the Santanders and Barclays of this world and slog it out on price – I’m quite happy to let them get on with that. And we acknowledge that for their bog-standard customers who sail through credit scores brokers will go for the best price. That’s the right thing to do.
Our place in the market is for clients who have a wrinkle in their credit history from the distant past but we’ve also got some good rates. In fact our pricing has gone down well with brokers
But our place in the market is for customers who perhaps have a wrinkle in their credit history from the distant past.
And we’ve also got some good rates. We’ve got a range of two-year discounts where the pricing starts at 3.98%. And we have three and five-year fixed deals too.
Our pricing has gone down well with brokers.
JM: Most mainstream lenders are targeting low LTV borrowers. Where are you placed in this regard?
CS: Clearly, when you’re starting out as a mortgage lender you have to be careful about the book you build – you don’t want to get a concentration of high LTVs. On residential deals our maximum LTV is 80%. We’re tiering by price, and on buy-to-let the maximum LTV is 75%.
JM: So you are quite conservative then?
CS: Yes, but you’d be amazed at the number of consumers appropriate for low LTV deals who just can’t get mortgages at the moment. For some reason they are failing big lenders’ credit scores.
JM: You will also be competing in the buy-to-let market which is about to be regulated by the FSA.
I seem to remember you once saying that if regulation is needed at all it should be focussed on the investment decision rather than the mortgage transaction. Can you amplify that thought?
CS: I haven’t changed my opinion on that but I’m also a pragmatist. Regulation in the buy-to-let sector is coming but it won’t be a problem for us because we’re treating our buy-to-let proposition in precisely the same way as our regulated residential loans.
JM: Staying with buy-to-let, home ownership has declined by about 3% in the past 10 years. Do you think this is something that should be addressed because as things stand the private rental sector doesn’t look as if it’s going to be able fill the gap?
After all, it seems to me that speculation about changes in the Capital Gains Tax regime is hardly likely to encourage new investors into the market.
CS: Yes, I think politicians are storing up big problems for the future. Three or four years ago there was a lot of talk of ambitious government targets for housing. And not long after that we heard talk of the UK population growing to around 71 million in the near future. But despite all this building activity has fallen away dramatically.
I don’t think that as a country we’re doing enough to address this situation, and it’s particularly disappointing that housing doesn’t seem to be high on the new government’s agenda.
While we saw a peak to trough fall in house prices of around 20% during the downturn it seems that there’s already been a recovery of about half that. As we all know, if there’s a shortage of housing supply that’s what will happen.
But as a mortgage lender all I can do is operate in the world as it exists. Sadly, there doesn’t seem to be any joined-up government thinking when it comes to the housing sector.
JM: And buy-to-let and the CGT issue – what do you think of that?
CS: CGT policy could have a big impact on investors coming into the market, or on existing investors extending their holdings. At least for a while, such professionals are likely to pause for breath and absorb what it’s all going to mean.
Meanwhile, the buy-to-let sector has been taking up a lot of the slack created by the absence of first-time buyers. After all, young people have to live somewhere.
JM: Returning to the launch of residential mortgages at Aldermore, I’ve been reflecting on some of things you said earlier. It seems to me that you are in a clear business space, with no tracker mortgage legacy. In other words, you’re starting with a clean slate. I suppose the only restriction on you is the volume of retail funds you have in the bank. How difficult is it going to be to keep the money rolling in?
CS: We’re entirely retail-funded but I’m not saying it will be that way forever. There may come a time when we want to diversify our funding structure but for the first couple of years retail funding should not be a problem.
And it’s not only that we don’t have any problems with back books, bad debts or low-earning interest rate mechanisms. Another plus is that we don’t have to pay money back to the government because we have not used the Special Liquidity Scheme or anything like that.
So we don’t have that albatross around our neck. That sort of thing must be holding other lenders back – the knowledge that they’ve got to refinance those loans.
JM: So you feel you’ve got a good springboard into the market?
CS: Yes, we are in a good place.
JM: Of course, start-ups aren’t new to you, and neither is variety. Looking back, you left Merrill Lynch subsidiary Wave to set up this venture but as I recollect you started off in financial services with Lloyds Banking Group as a graduate trainee, then moved to Leicester Building Society and from there to National Home Loans which was the first mortgage lender to fully exploit wholesale funding.
You then set up The Mortgage Business for Bank of Scotland and went on to join Britannia Building Society where you launched its specialist lending business Verso, now part of Platform.
After that you became managing director of Freedom Lending in 2003 and stayed at the helm for both the Merrill Lynch buyout in 2006 and the relaunch as Wave the following year. All this leads me to ask – what is it that drives you to keep creating mortgage lending businesses, and are you becoming wiser with each development?
CS: It’s easier to answer the second part of your question than the first because I’m not entirely sure what drives me to start up new businesses myself.
But having done several start-ups I do know that every time you do it you learn something new. Hopefully, you don’t make the same mistakes twice and you learn how to cut through problems and make things happen more quickly.
But for me, the most important thing is the team of professionals you work with. It goes without saying that systems are important and funding is too but if you’ve got a good team around you, you can get where you want to be quickly.
To go from a standing start to launching an operational mortgage business within five months is an achievement for us, and a personal record for me.
It goes without saying that systems are important and funding is too but if you’ve got a good team of professionals around you, you can get where you want to be quickly
And remember, that’s from a remote site with all the connectivity, systems, software, recruitment, and regulatory issues that implies.
As I say, we couldn’t have achieved this without a core team of experienced and skilled people who are used to working together.
JM: But if I can return to the issue of what drives you, is there an element of creativity in all this?
CS: Yes, I get a real kick out of it. To bring disparate elements together and create a business with products that customers want to buy is a buzz. And seeing completions come through and a mortgage book develop is highly satisfying.
JM: Finally, Aldermore is offering mortgages through brokers and we all understand how that model works, but how does the mortgage funding or deposit-taking side of the business operate? For example, do you advertise and are you in best buy tables?
CS: We’ve certainly been in best buy tables. One of the first things the company did following the change in control from Ruffler to AnaCap and the birth of Aldermore was to move the internal savings infrastructure to Newcastle Building Society.
This should give us the scalability to cope with whatever is required.