Known for its longevity, secured loans specialist The Loans Engine anticipates significant growth in the sector as MCD regulation arrives on the scene
If anyone thought the first charge mortgage market had it bad during the recession, they should take a look at secured loans.
Like many parts of the mortgage market, it had enjoyed a lengthy boom in the first decade of this century when credit was cheap and loans flowed. During that time, The Loans Engine was one of the biggest brokers in the sector.
“It was a great time for the market,” says TLE chief executive Ryan McGrath.
“We were recruiting 12 people every week, it was an incredibly competitive market and there were probably three huge brokers, with ourselves, Loans.co.uk and Freedom.
“We were each writing about £60m in one month, which is what the whole industry writes today. It was an exciting time with lots of lenders all fighting over business for market share.
“We had about 18 lenders compared to 15 today. And lenders were lending to 125 per cent property value and taking on much more risk than they do now. Criteria were also very different, with self-cert common – which has now gone and that’s a good thing.”
Then came the crash. At its lowest point in 2008 and 2009, the second charge market was worth just £200m-£300m a year.
While thousands of first charge mortgage brokers lost their jobs, the impact on second charge deals was even more severe.
TLE was one of the few to survive the wipeout, albeit it had to make many redundancies. The secured loans broker saw its number of staff plummet – from 372 pre-crisis to just 65 today.
Meanwhile, during nine horrific months in 2007/08, its lender panel dropped from 18 members to just one – Blemain Finance.
“It was grim,” says McGrath. “We did the first round of redundancies in April and thought we had done enough. But towards the end of the 60-day consultation we already knew we hadn’t cut deep enough and so, as soon as we finished and some people left, we began a second round in October, where we were cutting even deeper.
“The market moved so quickly. To go from 18 lenders down to one in just nine months was quite amazing.”
In what he calls a “leap of faith”, McGrath joined the business in the late 1990s as a trainee second charge underwriter, having spent nine years with Lloyds Bank. His faith was repaid as he was quickly made operations director in 2003 and became chief executive in 2014.
But TLE pre-dates even McGrath’s time. It was founded in 1988 by Andy Turner as part of a group of secured loan mortgage companies under the banner of Norfolk Capital.
TLE operates under the training name of Central Loans. Within the group there are other financial services businesses, including commercial broking, a second charge lender called Central Trust, Mobile Money and UK Credit.
Central Trust is a secured loans lender on the TLE panel but McGrath says it “receives no favour” and is under no pressure to sell TLE deals. The telephone-based broker has a network of 1,300 first charge mortgage brokers from whom it gains referrals and deals. It also offers bridging and commercial loan broking but says secured loans remain its core business.
“We have been trading for 27 years, including through two recessions, because we are financially stable,” says McGrath. “We have seen the highs in the business and the lows in the industry.”
Commercial director Steve Harness agrees the business is very stable, having survived the toughest market conditions in history.
“[Redundancies] were necessary for the business to survive and without stability we would not have made it,” he says.
“What was important to the directors at that stage was retaining a business so that there were jobs for at least some of the staff. The reason we were so resilient during the recession was because directors did not take the profits out of the business in the good years.
“There were no Ferraris or Bentleys 10 or 15 years ago. That kept jobs for a lot of people and, if you look at other businesses then, they closed down.”
Harness joined the company in 2008 after nearly three decades in the mortgage market working at Nationwide in the 1980s and for 18 years at Cheltenham & Gloucester. He moved to Norfolk Capital when it bought his “mortgage brokerage inside Lloyds Bank”, called Cheltenham & Gloucester Specialist Mortgage Solutions.
“All customers that Lloyds couldn’t help were directed to C&G specialists to find them a deal,” he says. “It wasn’t a great fit with the bank despite being a great service. It was a better fit within a brokerage group.
“It was a closely guarded secret. Lloyds ran it from 2004 to 2008 and it was just a business to look after the needs of customers that Lloyds couldn’t help itself.”
The brokerage had sub-prime lenders on its panel such as Kensington, Platform, I-Group and even Northern Rock – a direct competitor.
“Lloyds recognised that some customers needed help beyond its own product range and it could deliver that help in a very compliant way to its own group customers,” says Harness. “It grew beyond Lloyds’ own desires.”
Today’s TLE senior management team is completed by finance director Kevin Keane, who has had an eclectic career including a spell as finance director for Wycombe Wanderers football team and another selling electronics.
Most significantly, from 2004 to 2009 he was finance manager at Loans.co.uk, which was one of TLE’s biggest rivals at the time.
Keane joined TLE in 2012 and he has seen the market pick up again during his time with the firm.
“The last quarter of 2014 was when we really started to see change in the market,” he says. “It was driven by more lenders coming in, products being more appealing and rates dropping. As lenders fought for market share, they competed on price and it drove rates down considerably.”
Last year lenders such as Paragon Mortgages returned to the fold and more are known to be considering a similar move.
Arguably the most significant event for the second charge market is the imminent onset of mortgage regulation under the Mortgage Credit Directive. From 16 March, second charge will be governed by the same rules as the first charge market, heralding a new era for the sector.
Most importantly, for the first time all mortgage brokers will have to inform clients about the potential of second charge deals as an alternative to a remortgage.
McGrath says brokers have three choices: inform clients and do nothing; advise on the mortgage and then refer the packaging; or refer both advice and packaging to a specialist.
“First charge brokers will need to give advice on second charges to remain independent,” says McGrath. “To package second charge deals is quite complex so I can’t imagine they would advise and package the same mortgage.
“We expect brokers to refer to us to either just package the deal or both advise and package the deal for them. If brokers were to simply disclose the second charge options and then move on, it doesn’t feel like a great experience. Over time, they would start to leak customers.”
Another major change will be to fee models, which are constrained under consumer credit rules. McGrath expects fee levels to fall because brokers will have more flexibility in their approach.
“As we move over to mortgage regulation, we will be able to adopt fee models that more closely resemble those of first charge mortgages, which will drive them down.
“At the moment, the customers who proceed subsidise the ones who don’t. From March, we can take an upfront fee to ensure customers are committed to the application, so we will have fewer cancellations, which will drive down fees for those who proceed. We are looking at an upfront model.”
But the most significant change could be a quicker application process for second charge deals. Consumer credit rules mean borrowers must be given two periods of eight days to reflect on their deal. Under mortgage regulation this becomes a seven-day period that can be waived.
“This will allow us to rapidly decrease the time it takes to arrange a deal,” says McGrath. “At the moment it takes 30 days but I think it will come down to 10 days and it could be as low as 48 hours if borrowers waive their waiting period.
“When we are saying to brokers and their customers that we can potentially have the money in their account in a few days, it becomes a really attractive proposition.
“So we have a situation where rates are lower, fees will be lower and the time it takes to arrange a mortgage will be really squeezed down. At that point it becomes a mainstream product.”
Some secured loans that are sold on a non-advised basis today will also clearly come under the FCA’s fully advised mortgage rules.
A cause for concern regarding the imminent regulation is the uncertainty it will create over both market conditions in the next 12 months and how borrowers will react to the changes.
Most market participants expect an increase in lending during the next year but some lenders are hesitant to dive in at this stage.
Harness says: “We are one of the brokers that survived the recession so, because of our size and longevity, lenders tend to come and have a chat with us when they are launching.”
McGrath says a few lenders are hovering around the edges of the sector but waiting to enter until later this year.
“They are waiting to see the impact of the regulation,” he says. “Why launch a proposition today when you will have to change it to a mortgage proposition next year?
“We have seen a [freeze] over the past 12 months. For example, United Trust Bank is now lending secured loans but it is waiting.”
Keane says lenders want to find out both whether their systems are appropriate and how others handle the regulatory changes.
“It is partly how the market reacts to the changes,” he says. “Second charge should become more mainstream and we expect significant growth. Lenders want to see if that materialises before making significant investment.”
Lenders could be pushing at an open door with the first charge broker market largely unaccustomed to dealing with second charge loans.
Harness says he finds when touring the UK on roadshows that up to 90 per cent of brokers have never offered a second charge deal. But with today’s low rates, he believes the opportunity to blend second and first charge mortgages could be utilised by more brokers.
“If you rewind 10 years in first charge mortgages, a customer would take out a fixed rate, then another fixed rate and another,” he says. “Banks were hoping customers would drift on to the reversion rate, which was profitable for them. That model has been turned on its head with such low bank rates. Customers are drifting off fixed rates onto variable rates.
“If you have a client with a good mortgage and a pay rate of less than 1 per cent, you can blend it with a second charge and get a very good average rate for that customer. But 90 brokers out of 100 are not even looking at second charges. Are they really going to keep doing that?”
Harness calls second charge a “further advance with a different lender” and hopes it will be a key consideration when clients think about refinancing.
An idea that has long been floated for second charges is a first-time buyer top-up loan in the mould of Northern Rock’s 125 per cent LTV Together mortgage. But Harness is not convinced that such a product is still appropriate in today’s post-MMR market.
“It is straying into dangerous territory on affordability,” he says. “First charge lenders are doing all they can for first-time buyers and, in terms of top-up loans, Help to Buy is much more appropriate. We are more focused on borrowers looking to release capital where the lender won’t do a further advance.”
Keane says the first-time buyer market already operates at a healthy 95 per cent LTV level and second charge can add no more to it.
McGrath thinks secured lenders can help borrowers gain a further advance without giving up their attractive mortgage rate.
In an era when secured loan lenders and brokers have sprung up from nowhere and burned out just as quickly, it is unusual to see a firm lasting nearly 20 years in the industry. With the onset of regulation and a low interest rate environment changing how brokers think about mortgages, it is an exciting time to be in second charge. The biggest opportunity could come from the first Bank of England base rate rise in years, which is anticipated in the next 12 months or so.
The good times will never return in the same format as before but perhaps the sector is finally finding its feet again.