Sitting in Stephen Knight’s boardroom, the illuminated globe serves as a reminder of GMAC RFC’s worldly parentage. Knight is executive chairman for the UK residential mortgage lending operation owned by GMAC Financial Services, which has 29,000 employees in 40 different countries. In turn this is owned by General Motors, the largest automobile company in the world. Suffice to say this UK division, GMAC RFC does not lack resources or capital.
Nonetheless, Knight is keen to point out with such a large operation in the background, he must use its capital efficiently and effectively or risk losing out to other group operations where returns are better or more secure. At the moment though, he has few worries on this score. GMAC RFC has in the last three years improved both its volume and profitability ten-fold. Last year, it completed £3.3bn worth of mortgage applications, of which £1.7bn was sub-prime business. This year Knight says he is looking to post figures in excess of £4bn and to help reach this target the lender last week acquired High Street Home Loans in which it had previously held a minority interest.
GMAC RFC has around 800 staff in the UK, operating out of a head office in Bracknell, Berkshire, with another main office in London’s West End. The lender is one of a growing number that offer residential mortgage products across the board and Knight believes this is one of its great strengths.
Most of GMAC RFC’s competitors either compete in one or two areas of the residential market, or use different brands to cover as many sectors as possible.
He comments: ‘We are in all product sectors as a single brand, which has been pivotal to our success. You have to be in all sectors to drive all parts of your business.’ He adds: ‘If you have success in the mainstream, you sign up the big distributors and then you can tell them about your product ranges in other areas.’
GMAC RFC is an amalgamation of Private Label, the mainstream market packaging operation set up by Knight in 1987, and GMAC Financial Capital’s own sub-prime lending operation. Private Label was brought into the group in 1998 and in the spring of 2000 both operations were merged to form GMAC RFC. Knight subsequently headed it up and has driven it down the securitisation route.
He believes fervently in the strategy of keeping its lending off balance sheet, and says securitisation and portfolio sales will remain an integral part of the business plan moving forward. Of last year’s £3.3bn lending, £2.7bn was sold on, according to Knight, and the rest is being wrapped up with some of this year’s early lending to be sold before the end of the month.
In selling on the mortgages, Knight says the key is to ensure the terms it is offering to borrowers today are going to be attractive to the investors looking to buy and fund the business tomorrow. As such he believes both intermediaries and customers benefit from the strategy, with GMAC RFC having to offer competitive and innovative products.
As Knight explains: ‘This method of funding can arbitrate the time difference between the market wanting the products and the lenders supplying the funding for them.’
Although the likes of HBOS, Abbey National and Northern Rock also securitise large amounts of their business, Knight is adamant that demand from investors will remain high.
He says: ‘Every indication is that demand far outstrips supply. We are offering a positive return to Libor on AAA-rated securities.’ He cannot think where better returns for such stocks are available.
Following a securitisation, GMAC RFC remains in charge of servicing the individual mortgages. However, following a portfolio sale ‘ GMAC RFC did 10 last year ‘ the administration is also passed on to the purchaser. Again there is no shortage of buyers, and Knight claims many building societies have come back for further books of business after initial purchases.
Picking up these books of business has become popular with many of the smaller building societies. He says: ‘Instead of slugging it out with the bigger lenders, many regional building societies can make up their lending figures by buying portfolios.’
To get the best business through its doors in the future he feels the smaller building societies will have to spend a lot on procuration fees, administration and processing whereas quality portfolios are available to buy as a whole.
This has led to a change in thinking by some of the smaller players who are now driving the portfolio sales market by making their desired lending targets through purchasing the necessary business. Indeed, eight of last year’s 10 sales were to building societies. Knight believes this has ‘opened up clear water between the plcs and building societies’ in the basic strategies they are using, and has helped them maintain decent volumes of business without having to compete directly with the larger players in the market for volume business.
Although Knight feels GMAC RFC leads the way in terms of price and product range in many areas of the market, he claims it is not at the expense of compromising on criteria. Generally it tends to be conservative and Knight believes its loan-to-value figures are among the lowest in the industry. This is something Knight says will continue as he is not prepared to fight for business at the limits of borrowers’ affordability. The logic is simple and he explains: ‘We cannot sell a loan unless it is paying.’
Both price and product innovation have been fierce battlegrounds in recent years for providers, and Knight highlights service as being key in the future. To ensure GMAC RFC can continue to grow and meet the targets it has set itself, he mentions initiatives that are being worked on to improve the lender’s offering to brokers.
Software is being imported from the US to allow GMAC RFC to offer point-of-sale decisioning on applications and speed up the current process. Knight comments: ‘At the moment most mortgage applications go through a tedious information gathering process that leads to uncertainty.’
GMAC RFC aims to be able to provide software that will enable a decision ‘ yes, no, or to be referred ‘ at the point of sale. Once given, Knight says GMAC RFC will honour the decision made unless a mistake has been made in entering the data giving, for example, a salary of £500,000 rather that £50,000.
Six pilot schemes are to be started in brokers’ offices in March with a further six expected to begin later in the year. Knight hopes to roll out the technology in 2004. A lot of work is also being done to enable valuations to be made at the point of sale, although Knight believes this will take longer to install.
He agrees that underwriting in this fashion is not as accurate as having it done manually, but believes the rise in applications it will create far outweighs any credit losses that might arise. He says: ‘I accept that at the margins human underwriting is better, but the software is very sophisticated and will help us…we will increase our volume.’
Elsewhere, Knight is keen to expand the remote processing operations in place with 20 intermediaries across the country. As such GMAC RFC offers its bigger partners the opportunity of setting up an in-house processing centre with staff and software provided by the lender. The idea is that the introducer then has greater control over the timing and quality of the work being processed, and can ensure it meets required standards.
Knight explains: ‘I believe there are a number of companies in the UK big enough to have their own brand and as such could suffer reputational damage if servicing standards changed. In the packaging market, you are exposed to your least efficient lenders.’ GMAC RFC administers 50% of its business this way and the figure is set to grow. There are 20 such operations in place at present and Knight aims to have 30 in place by the end of the year, and 40 by the end of 2004.
Looking forward, Knight is confident about the long-term health of the housing market and the opportunities available. He points to shortfalls in housing supply, increasing economic growth and rising incomes as underpinning future house price rises. Incoming regulation is set to cost GMAC RFC £1m a year, and although Knight agrees consolidation will happen in the intermediary market, he says it will not lead to a fall in the amount of business it generates.
He comments: ‘The larger intermediaries will increase business. Regulation will not produce a reduction in the overall intermediary business.’ In terms of opportunities that will arise, Knight feels: ‘Networks, mortgage clubs and packagers are well equipped,’ and he sees regulation driving member and business numbers.
Knight hopes the work being done on point of sale decisioning and remote processing will help drive the intermediary business towards GMAC RFC as it aims for around 2% of the market this year. As a qualified chartered banker Knight gives the impression he has got his sums right.
While the market may not see the rises it has done in recent years, he says it will not collapse as some have suggested. He accepts household debt is high, but points to a change in household earning patterns. Most people now live off two incomes and not one as in the past. In certain areas where rises have been meteoric, he feels there will be regional spikes, but not on a national level.