Paragon executive director John Heron answers questions on the firm’s shift towards retail banking, diversification and how the market is reacting to new portfolio landlord rules
Q: How has the buy-to-let market reacted to new portfolio landlord requirements brought in on 30 September?
A: It’s very early to be conclusive about the impact, but I think these requirements were absolutely necessary. It’s been interesting that lenders have taken a wide variety of different approaches, not that that’s wrong.
But from an intermediary’s perspective there’s not a great deal of consistency from one lender to another, and that is a challenge.
You’ve come from a position where there was a relatively consistent approach to affordability from one lender to another, meaning an intermediary could easily analyse the market and understand where the best outcome might be for any particular landlord, to a position where that is not clear at all.
It’s not clear what loan a landlord might qualify for, neither is it clear how information might impact on the lending capability.
I think that has been made more difficult by the fact that a lot of lenders left it until very late on to announce what their requirements were going to be. Waiting until very late to announce, then not announcing a great deal of detail, leaves landlords and intermediaries a little at odds in terms of what lenders want.
Making sure that landlords have the widest choice of product has definitely become more difficult with the recent changes and the way those changes have been implemented by lenders.
For the main part, sourcing systems are not going to work well for the landlord community, given the significant increase in the number of variables now that would govern the lenders and products available. I think there will be an increasing focus on specialist intermediaries and lenders.
Q: Can you tell us more about why Paragon has turned its focus to retail banking?
A: For many years the buy-to-let section of Paragon was essentially a monoline business, buy-to-let mortgages funded through mortgage securitisation. That remains a very successful business for us.
But one of our key strategic realisations, through and following the financial crisis, while that created a certain strength – the business remained stable and profitable throughout – being a monoline funded lender gives you a vulnerability.
A core realisation was the need to diversify the group’s lending streams and its funding, to make sure that the group was as resilient as possible in any environment we could see going forward.
That is a strategy that has inevitably taken some time to deliver, not least because of the slow rate at which the economy, and the capital markets, recovered after the crisis. But a key plank of that strategy was to establish a bank within the group.
That bank got regulatory permission in early 2014. Our original concept was that the bank would sit as a subsidiary of the group and would use retail deposits to finance the diversification of lending.
As time has gone by we originated more buy-to-let business within the bank than we have in the wider group.
In a market where, increasingly, retail finance has become our strategic form of funding, and mortgage securitisation has increasingly become tactical or opportunistic, we needed a reorganisation to effectively make sure that all the originating and operating businesses sat within the bank where your strategic access to funding was focused.
Q: Could other lenders follow suit?
A: In many ways Paragon is unique. It has been a specialist lender since 1985. We were the first lender in the UK to securitise mortgages, for instance. We have a long history of innovation. Some specialist lenders you see in the market today don’t have that history. It doesn’t mean the model is inaccessible to them.
And you have seen, particularly in the last four or five years, quite a diversification of business model types in the mortgage market. I think the key question for any board is: How resilient is your model through the cycle?
Q: What will the future bring for Paragon in terms of diversification?
A: On the lending product side, as well as buy-to-let we have a fledgling specialist residential lender that we are expanding as we speak.
That’s been in a pilot phase since the early part of the year, and we have been expanding that to a wider number of intermediaries.
We also have a second charge personal loan business. Both of these sit within a broader mortgage business. Outside of that, the access to retail funding has allowed us to extend our reach in terms of both diversification and social usefulness.