Victoria Hartley: What’s changed since the credit crunch to put the spectre of another sub-prime credit crunch behind us?
Guy Batchelor, sales and marketing director, Belmont Green and Vida Homeloans: Underwriting standards are far higher with the use of people, instruments, data and credit analytics that’s now prevalent.
Affordability – there is no self-cert and we look at future probability of loans and stress for the future, so we look at the probability of default. That gives you a far better understanding of how loans will perform.
VH: How much of that is regulation, how much mortgage lender choice?
David Tweedy, CEO, Belmont Green and Vida Homeloans: A lot of its been choice. If you look at the lenders that survived the crisis – Paragon, Platform, it’s always been best practice to understand and underwrite the customer and have criteria that’s sensible.
No-one wants to lend to customers who won’t pay you back. Having said that, there were firms who originated loans with a high probability of default and they might transfer that risk, but that’s no longer possible as banks are required to hold onto at least five per cent of first loss risk now.
VH: Do you have more comfort that the rogue mortgage brokers’ modus operandi was a large part of the problem pre-2008 and few are still operating in the mortgage market?
GB: Two things. since 2008, the industry has changed quite a bit. On regulation – the networks have done a good job and there are also some rather large DAs now, real powerhouses.
DT: The strongest brokers survived.
GB: Mortgage broking firms are a lot more switched on, doing whole of market advice, new areas of the market – and the average age in the industry has also changed. A lot of new blood brought the average age down to 40s, those guys are a higher calibre, they are working their client banks, staying close to their customers and harnessing their Client Relationship Management tools.
DT: Culture is very important. The intermediary community has changed and there is a sense of community and partnership, working together which makes for a strong intermediary market and strong lenders.
[Note: Vida has securitised just over £1bn of debt in three tranches since the lender’s launch in October 2016, but securitisation still only funds around £5bn of mortgages in the UK.]
DT: This could change. One of the high street banks could do a massive securitisation at any time of £4-5bn.
VH: So where is global investor appetite for UK mortgage securitisation?
GB: It’s increasing but our main lending competitors are banks or have turned themselves into banks, which gives them the flexibility to use a variety of funding lines including deposits or securitisations. [On bank securitisations] if you look at some of them, they have kept certain types of lending back on balance sheet and picked and chosen what they wanted involved in the securitisation.
So if you were to look at some of the more recent – the lenders want more prime mortgages involved, so they kept the ltd co, or improving credit mortgages back.
DT: The reason they do that is the better the asset pool you put into the securitisation, the lower your class of funds. We have to put everything into the securitisation because we don’t have deposits, whereas competitor banks can cherry pick from their balance sheet and get a lower cost of funds.
GB: It’s how investors view the credit, they might say we don’t want new build or too much exposure to Vauxhall in London so you don’t put that on the balance sheet. You also have investors who want different things determined by their own views of credit and risk – some love London and the South East, others don’t want it at all.
VH: The pre-credit crunch appetite for return on investment at any price. That seems to have left the market. What happens if it reappears as margins get ever tighter?
GB: Regulation can’t be ignored now. The lending policy of every lender has to be submitted to the FCA/PRA once a year and occasionally looked at by the PRA, which also asks for more data on lending if it has concerns.
DT: On a more holistic level too, the banks and building societies are also being watched by the PRA in terms of their capital. If you don’t get a return on capital the you run out of capital so there is a degree of rational pricing gets forced on to lenders. Specialist lenders take a little more risk for a higher return. For the big banks it’s typically a high-single digits return on equity. For specialist lenders, the returns are in the high teens.
GB: If you looked at the bad old days. Self-cert went up the loan to value (LTV) spectrum. The level of adverse went higher and higher, non status lending was everywhere.
These days, lenders are looking at new products or putting new ideas to work in market niches, including using earned income to top up buy to let, or using own income to buy a holiday home, limited companies, student lets, contractors, the gig economy – we’ve lent to quite a lot of these, but there is probably a lot more we could do.