New lending may be scarce in the current market, but there are still millions of mortgages in the UK to be managed, many of which sit under brands that no longer exist. Hence Lending Strategy’s round table and lunch this summer (sponsored by HML) explored the potential of legacy mortgage books
Given the right participants a round table can be a real adventure, whatever the topic, or at least so I hope as we gather in Sartoria to break bread, sip wine and swap views. Add to this the prospect of lunching at my favourite London restaurant and I’m looking forward to the afternoon ahead.
With attendees from two of the very biggest high street brands in the UK market and an interesting mix of attendees from across the industry, the conversation promises to be intriguing to say the least.
The topic for the day is ’what can lenders do to get the most out of moribund mortgage portfolios’, which is quite properly important to our sponsor, HML, and surely a burning issue for those institutions who own a range of brands.
It’s also surely an issue for those lenders who dipped their toes into the deep waters of the sub-prime market back in the golden days of portfolio trading which came to an abrupt and sticky end in 2007/8, particularly the building societies.
As the guests introduce themselves I begin to realise that we’ve an interesting cocktail of responsibility and expertise and some back book legacy issues to boot that impact on all lenders, including the very biggest. I’ll quote directly from each participant and you’ll see what I mean.
Alex Stephen is director of financial outsource processing at The Nostrum Group: “Nostrum is a financial outsourced processing services and software provider specialising in the unsecured lending sector.
“We have recently formed a joint venture with HML to combine our sector expertise with their scale and infrastructure. We work with many of the leading brands in the UK financial services market across current and legacy products.”
Marc Page, head of relationship marketing, Lloyds Banking Group Mortgages: ” I currently look after the existing customer book for our brands, so that is Lloyds, Halifax, BM Solutions, Intelligent Finance and the legacy books of TMB, and some of the other brands we have acquired over the years.
“I’m primarily responsible for looking at the portfolio: which customers do we want; which customers do we want to try hard to keep; which customers do we want to try hard not to keep, and putting products out there to try to deliver us our customer strategy.
“In addition we’re still lending and we’re doing the secured lending portfolio as well for the group. Then I also pick up one-to-one direct marketing, so that is really being able to get to the customers and help us drive our strategy for the customer.”
Paul Kane, senior corporate account manager, NatWest Intermediary Solutions, says: “I work for a part of the bank that is primarily involved in intermediary mortgage production. We’ve changed our brand recently and in our brief journey we’ve gone from multi-branded to single-branded. So we don’t get involved directly in legacy loan books.
Kane: “It’s an interesting point about cross-selling – once we put business on the books, how does the group then sell it? That’s a whole different proposition”
“In terms of retention, we don’t have an intermediary-facing retention strategy; the group has a retention strategy for all of its businesses, so our position is perhaps slightly different from that of Lloyds. I guess anything that I will bring to the table is more around the sales side than an intimate knowledge of legacy books, the risks associated and the opportunities there.”
Bob Young, managing director, CHL Mortgages, says: “Well, at the moment it feels like I’m a third party administrator. Yes, we are a specialist. I think I’m the only person here who’s in that arena – a specialist sector intermediary-led business with assets of £6.5bn that we originated and now manage.
“Like most of the people in our space, we don’t have access to the Special Liquidity Scheme but that’s a story for another day. We’ve had to shut up shop and stop lending temporarily although, fingers crossed, that may change in the future.
“We’re quite fortunate in that we were always considered a very conservative lender and as such we’ve a very good, clean book. I was fairly disdainful years ago of a lot of the lending that went on in the UK. I thought it was lending for five year-olds. I think people who did that lending haven’t probably learnt their lesson because they are no longer here – but I think they got exactly what they deserved.
“We’re mainly buy-to-let, so we’re great receivers or rents and we’ve a portfolio that performs pretty well.”
Jeremy Wollerton, head of consumer services, Western Mortgage Services, says: “We used to be part of Britannia Building Society but we’re now part of CFS (Co-operative Financial Services) and currently have £11bn worth of assets under management, so we’re, I suppose, by default the second largest outsourced administrator in Britain – second to HML.
“The majority of the assets under administration at WMS are group assets, to the tune of about £7bn and we have £3bn of assets that belong to a troop of third parties. We’re still involved directly in the new lending from our sister company Platform. “We’re looking after non-membership assets. The loans that originated by Platform were purchased historically through Britannia Treasury Services and didn’t get membership rights as a Britannia Building Society customer would.
Therefore the emphasis is not on products but more on managing the customer experience in line with whatever the lender wants that experience to be and trying to manage the whole thing more
“Historically we’ve not aggressively sold our third party administration relationship, so we don’t see ourselves as a direct competitor of HML. But when assets were sold to third parties, we maintained all of the administration of those assets and indeed have had portfolio gains on the strength of the service relationship that we have with third party clients. So, if they owned assets that may have been somewhere else, they pump those into us, so we’ve made gains there, but it is not an aggressive strategy to say we want to enter the third party mortgage administration space.
Thus we have participants from two of the UK’s largest lenders which collectively represent close to 40% of mortgage lending, which have had access to the Special Liquidity Scheme and a mountain of taxpayers’ money, and which have diverse brand and distribution strategies as well.
We also have the chief executive of a specialist buy-to-let lender without access to the SLS or any government support which has a track record of responsible lending but isn’t lending at the moment, and we have an executive from the servicing subsidiary of what was formerly the UK’s second largest building Society and is now part of CFS.
Then to add to the diversity around the table and to underline the fact that there are many solutions to any given challenge we have Jo Gill, head of PR at HML, and Julian Wells, director of marketing at HML. For the record, HML has £45bn worth of assets under management and 34 UK-based and international clients.
It’s Julian Wells, in his introduction, who pulls the different strands and the theme of the day together. “We’ve picked today’s topic in partnership with Lending Strategy because”, he says, “it’s close to our hearts at the moment and we’re finding that we’re having more and more conversations with people about legacy portfolios”.
He is confident of an interesting debate. Will he be right? To start the ball rolling I question the performance of traded mortgage books. Some building societies certainly got the business badly wrong but obviously not all the books were toxic and those that are still performing might be worth exploiting but how?
Julian Wells says that in terms of the condition those books are in, it probably goes back to the lending policy of the originator at the time the loans were made. “So, you could maybe define it by institution, but it might even go by time period, or the management team at the time or the product set. It could be any one of those things, so I’m not sure if you could make a sweeping statement that they are all good or they are all bad. You would have to look at them one by one.”
Jo Gill suggests that Marc Page at Lloyds must have “a massive overview” of what has happened in different time periods because of what he’s managing. “Can you actually segment customers into, I am not going to make a profit out of these in the future, so forget about them”? she asks.
Page says that the picture is fairly complicated. “It depends not only on which brands we were using, but on what basis did you bring the customers on. So, some customers like time deals at low margins, some customers would like time deals at high margins and it is literally a combination.
“On our portfolio of £340bn we’ve customers in all camps, and I think the challenge for us is – and that’s probably the same for everyone – the customers that you probably wouldn’t want on your book right now are exactly the customers that nobody else will want to take on. Therefore, the question is what margins are they on and if they are not in the place you want them to be from the margin perspective, how do you help them move into different products?
“It’s an interesting challenge because with the market the way it is in terms of remortgaging and customers staying with their current lenders, a lot more focus is going back into how to manage existing customers for the next five years to try to maximise the performance of your portfolio.”
Jeremy Wollerton of WMS is curious. “You’re in a unique position with the kind of information that you get from, presumably, bank accounts and that sort of thing, so is that strategic customer segmentation based on the current arrears position or is it around the future state of the customer in five years’ time and can we extract worth out of a customer for the long term”?
Page’s response is candid. He agrees that that there’s probably data available to do exactly that but adds: “I think we’re probably, as a group, a lot stronger at actually understanding where customers are today and how they’ve performed in the past, rather than projecting where they’re about to go or where we think they are going to go.”
And he’s equally candid about the challenge facing the industry. “Low interest rates have actually helped performance in terms of customers and I think a challenge for us as an industry is what that will look like when interest rates start to rise and customers aren’t getting the benefit of the extremely low Bank of England base rates.”
The conversation returns to getting a customer view and someone suggests to Page that with so many big portfolios and brands this must be extremely difficult. However it’s not the logistics that are difficult, he asserts. While getting a view on a monthly basis is not so easy, pulling out tranches and doing time series reviews of them, he ventures, is fairly straightforward.
The problem, as he sees it, is that although it is relatively easy to segment one’s customers and say, ’Those are the ideal ones; that is who we’ll try hard to keep and those are the ones that potentially we’ll not try hard to keep’, the reality of the marketplace makes it difficult to do anything about it.
Bob Young picks up the theme from Page. “At this moment I dare say, like most lenders, you want to deleverage a book”, he says, “but the reality is there’s nowhere to go.
“As for trying to make the less profitable ones more profitable, you run straight into the Financial Services Authority which has said it’s actively looking at people being tempted onto really good rates today that are moving in from maybe a base rate tracker on to an SVR which is going to disadvantage them in the future.”
So as a strategy are product upgrades or cross selling no go areas? Julian Wells asserts that this is another part of the debate, that on the one hand there’s your customer profitability and on the other hand there is your infrastructure profitability. A lender’s view may be “we’re running this as effectively as we can, no matter what the customer experience is” so our challenge to them is whatever there is is a better way of doing it.
Therefore, the emphasis is not on products but more on managing the customer experience in line with whatever the lender wants that experience to be and trying to manage the whole thing more efficiently than the lender would.
“That’s where we have conversations with people”, Wells says, “I think though it is quite different to what we’ve been talking about, which is looking at who do we want to keep; who do we not want to keep.”
“But, maybe wanting to keep for different reasons”, Bob Young argues. “I would guess if you have current accounts and a load of other products, if you model a customer it’ll not just be based off a very black and white view that I’d have on it: does this make profit; will it make profit and do I want it based simply on the cost of funds and margin I am getting?
“I used to work for Abbey. When I worked there we had four different models for profitability. You had the treasury, the financial accounting, the marketing and the sales team. The marketing was separate; the treasury said to sales you’ll never make any profit on any of this and they were right. That model where you sell four extra products – it doesn’t work, sadly.”
Paul Kane from NatWest seems to agree, at least in part. “We did some pilots last year. We traditionally had just done mortgages and so we tried to sell ancillary products – current accounts and savings accounts, and we’ve taken the view now to just stick to what we’re doing best because, although we did shift some volume, actually it wasn’t enough volume to make it pay. So, if anything, we are going back to bread and butter and just concentrate on mortgage production and not looking at those other opportunities from a sales position.”
Kane, however, sees the issue as a distribution problem, rather than an issue with cross-selling as a workable proposition. “I think we were trying to do that at the front end and either bring to market some ancillary products that we could sell through our intermediary sales teams or offer a mortgage product that, for example, would be at a certain rate if you took a current account with us. But then you’ve the issues around who’s going to bring those different products to market?
“So, we were relying on our retail colleagues to open, for example, the current account. As a standalone business trying to tie those two together, it seems very simple on a piece of paper to say, ’Why couldn’t you do that?’ The reality is it is quite difficult to make that a good customer experience.
“Then there’s the question of how much volume we’re going to do? Are we going to be better at opening current accounts than the 2,000 branches we have on the high street? The answer is probably not. It’s an interesting point about cross-selling – once we put business on the books, how does the group then sell it? That’s a whole different proposition.”
There seems to be a fascination with the problems of the bigger players and their complicated distribution and branding propositions. For example, how do they join up everything from a customer experience perspective?
Julian Wells, addressing Marc Page, is quite specific. “Who joins it all up? Is that where you come into it, in terms of looking at what is happening to that person with their Intelligent Finance mortgage who’s on the marketing list for a Halifax credit card and who also has a Bank of Scotland loan or mortgage from a few years ago. How do you stop them all getting letters on the same day?”
“We’re just not that intelligent” Page confesses. “We’ve to put our hands up and say, ’No’. It’s pretty much within brand, and if you’re not within the brand it’s fair game.
“There’s a marketing view of actually putting rules in place of who you can contact and how often and everything else. If somebody walks in and we know that they’ve an Intelligent Finance mortgage, we don’t do anything with it. It’s all around wherever the customer comes first; whatever channel they choose, and that channel is set up to sell. So, that could even be a Lloyds’ customer walking into a Halifax branch; the Halifax branch would say, ’Fine, you are a target.’”
Life at NatWest is a lot simpler. “Yes, certainly from the intermediary space now, everything is badged NatWest”, says Kane. “In our previous regime, we had different brands lending different products, so NatWest was primarily a buy-to-let arm and Royal Bank was house purchase and First Active remortgage.
“I guess in attempt to give brand clarity it makes sense but in reality what the customers wanted was a mortgage and from a broker’s perspective it wasn’t transparent; it wasn’t as clear as it could have been, so hence we’ve come to this position that we will go back to having NatWest as the brand that does all types of mortgages through intermediaries, which I think they were crying out for.
“Prior to the brands coming together, we had three separate sales forces calling on the same broker”.
Turning to Marc Page, he adds: “I’m ex-Bank of Scotland so I know you’ve a similar situation within your group as well. Now, I guess we are at a situation where a seller sells just a NatWest brand and whether it is a buy-to-let or a purchase to remortgage. It doesn’t really matter.”
Table talk: The single view debate
Under the banner of responsible lending the Financial Services Authority will expect lenders to take a view of customers across their range of products. Over lunch there’s talk of the problems of customer segmentation but taking a single or holistic view of customers seems to be viewed as a mission impossible. Julian Wells: It’s going to be impossible. We’re talking about a huge project for you guys especially, but I think for anybody who had more than one brand- I don’t know whether you can do it in the CFS group.
Jeremy Wollerton: I’m not close enough to that, but I doubt if a single view is possible. I don’t think that we’re that clever, basically.
Jo Gill: There’s always an assumption that everything gets joined up and the reality in any of these large organisations is that people sit in their little silos and they do the job that they need to do to sell to the market that has been identified and shift however much money on mortgages.
Thinking that you can be smart about over-indebtedness or anything like that is an aspiration that is going to be very difficult to achieve.
Alex Stephen: Doesn’t it all come together with the credit reference agencies? Even if you cannot manage it within a large Lloyds, it can come together externally through someone like Experian or Callcredit.
Bob Young: That’s just a very narrow view of the customer, saying that from a credit perspective it has either a score, it has an index of – a number – but that’s just another view. You have to put that in terms of what else you know about the customer.
Alex Stephen: Yes, I think certainly in terms of what that customer has done in their life, you are probably closer to the reality of that when you are managing them yourselves. I think, in my experience of things like Callcredit, they are getting a bit smarter now about adding more value than just a score to things like strategy manager and getting quite forward.
And on affordability
According to the FSA’s own figures, the cost to the industry of implementing the affordability requirements will be between £3m and £15m and the ongoing cost will be between £5.8m and £20.3 per annum but according to the table talk the affordability goal is an ambition too far.
Bob Young: I had a meeting with the FSA last week and I asked: “What exactly do you want us to know? Do you want us to know that the chap has a kid in private school; his wife is pregnant, about to have another child; the likelihood is they will send that child to private school. Therefore, you have to take into account the school fees at that point of loan or do you go and say, ’Well, actually you can’t afford two so I’m going to take that one out’ so you have more disposable income’. Where do you go with this?” “That’s a very good question’, they said. “We’ll wait for the responses”.
Jeremy Wollerton: If the FSA says we’re going to that level of detail or was suggesting we went to that level of detail, I think the only people who would be in a position to do that would be Tesco Money. The rest of us would suffer somewhat if they were taking it down to that level of disposable income on food and whatever.