Pepper Money completes £629m securitisations
The first transaction was a £352m securitisation of specialist first charge residential and buy-to-let mortgages originated by Pepper Money.
This was followed by a £277m securitisation of second charge mortgages originated by Optimum Credit.
Both transactions attracted strong investor demand and were oversubscribed in a competitive market and uncertain economic environment, the lender said.
Pepper Money and Optimum Credit recently signalled increased lending appetites with the launch of enhanced products and criteria.
Laurence Morey, chief executive of Pepper Money (pictured), said: “The success of these securitisations is particularly pleasing given the completely unprecedented environment we have lived through in the last six months and the challenges faced by non-bank lenders.
“It is reassuring that there continues to be such strong investor demand for high-quality assets and this provides us with a solid foundation on which we can confidently continue to grow our first and second charge lending volumes.
“We will, of course, remain cognisant of the changing environment and maintain a robust and appropriate approach to underwriting, but we do so with an honest appetite to lend and a deep commitment to supporting our intermediary partners.
“I am confident that the challenges we have overcome will help us to establish a stronger sector that is better able to deliver the solutions that brokers need to meet the changing needs of a diverse group of borrowers.”
Hands-on underwriting requires proactive and honest communication from lenders – Adams
The property market has been given a shot of adrenaline by the limited period stamp duty holiday and mortgage applications have skyrocketed, with many brokers saying they have never been busier.
At the same time, lenders are addressing every application with more scrutiny, which means the process is taking longer and the system is becoming clogged up.
So, why are lenders taking longer to review each case and what can brokers and lenders do to improve the situation?
Big shift for lenders
The first thing to consider is that complex is the new normal.
With so many millions of people being furloughed or taking payment holidays on their mortgage and other credit commitments, cases that were previously straight forward, now have different levels of considerations.
This is before you consider the self-employed, contract workers or people who previously had a record of adverse credit.
So, a more hands-on approach to underwriting and assessing the affordability of each case individually is now commonplace.
And this is a big shift for mainstream lenders.
In an article in Mortgage Solutions on the frustrations being experienced by brokers, Payam Azadi, director and partner at Niche Advice, said: “Historically lenders were confident by the aid of technology, but now more and more cases have to be individually underwritten.
“That’s not a problem for specialist lenders but it is for a volume lender. All of a sudden, they have to put a series of manual processes in.”
Communication is critical
It’s fair to say that the requirement to take a more rigorous approach to underwriting isn’t just reserved for mainstream lenders.
Any prudent lender in the current uncertain and unprecedented environment should be taking more steps in its underwriting process to ensure the mortgage will be sustainable and affordable.
However, specialist lenders have built their businesses on taking a hands-on approach to underwriting and so now that this is required on nearly every case, it’s specialist lenders that have the expertise in how to manage, not just the underwriting, but also the process.
A key part of the process is communication.
Specialist lenders often require more documentation to support an application than a broker might expect from a mainstream lender, and so we have worked hard to evolve our processes to ensure we ask for everything upfront and communicate openly with a broker about how these documents are being used and why we need them.
There are also often more contact points along the way working more closely with the broker.
The reality of the current situation is that cases are sometimes taking longer to process and that can be frustrating.
Clear communication and honest dialogue are the two things that can help reduce this frustration and, in the specialist market, these are qualities that have been important to all lenders in recent years as we have identified ways to best support our hands-on approach to underwriting.
Now that hands-on underwriting is becoming more common, so too should proactive communication and honest dialogue.
Pepper removes CCJ and defaults caps while trimming BTL rates
The lender has lifted restrictions on county court judgements and defaults meaning there is no cap on either volume or value for these.
It is also able to consider unsecured missed payments within the last twelve.
Rates have been cut on its buy-to-let limited company range with its lowest starting from 3.25 per cent.
And the lender has re-introduced its flat fee structure.
Pepper Money sales director Paul Adams (pictured) said the lender would be introducing more changes over the coming weeks and months.
“This latest enhancement means that we can take a more flexible approach to lending for customers who have recent incidents of adverse credit,” he said.
“We are proud to be able to offer a solution to a growing number of customers who do not fit the restrictive mould of the high street credit scoring model.”
Pepper has also been added to the Primis lending panel, allowing the network’s appointed representatives (ARs) access to its residential and buy-to-let mortgage ranges.
Primis mortgage network proposition director Vikki Jefferies said increasing the specialist proposition would be a key focus over the coming months.
“The property market is buoyant at the moment and more customers are finding that their needs are best met by a specialist lender that is able to take a pragmatic approach to recent changes in their circumstances,” she said.
“Welcoming Pepper Money onto the panel will be greatly welcomed by our members and we are confident that it will ensure more of our AR firms can continue supporting their specialist customers with the tailored lending solutions they require.”
Affordability the priority for adverse credit lending – Belton
And he noted that the club had seen a 30 per cent increase in the amount of lending that was being completed with specialist lenders.
Speaking on Specialist Lending Solutions Television in association with Pepper Money, Belton disputed concerns that regulators would be worried this market was drifting towards sub-prime lending.
“Yes we need to be careful as an industry, but I think now the Mortgage Market Review (MMR) rules are well embedded into our industry as to what is the right advice,” he said.
“We’ve got the loan to income (LTI) caps and relative stress testing, so every case is underwritten to a really strong standard now and therefore we’re making sure it is actually affordable, for the right reasons, and lenders are lending to the right customers.
“If they feel the customer is going to be under pressure or potentially threatened by the size of the loan or the repayments that are there, they are not going to lend.
“So I think as an industry we’re in a really strong place because of that, to help these customers sensibly,” he added.
Pepper Money sales director Paul Adams echoed Belton’s comments.
“I agree, affordability is king, hence why with so many specialist lenders the underwriters will want to look at bank statements to make sure there is no stress in terms of their current financial situation,” he said.
“We’re lending to customers who’ve had problems in the past, not problems today, but affordability is at the forefront of all lending decisions.”
One missed payment can result in a CCJ, but borrowers have mortgage options – Pepper
However, he added that despite this borrowers looking to buy a property should not despair as they could still have options open to them.
Speaking on Specialist Lending Solutions Television in association with Pepper Money, Adams noted it could only take one minor incident to create a credit issue such as a County Court Judgment (CCJ).
“The understanding of how you can arrive at a CCJ – most people won’t know that you only need to miss one payment to get a CCJ, so there is a little bit of a lack of understanding,” he said.
“One thing that is loud though, and I think it’s important for the people sat on the sofa to realise is that a good 70 per cent of borrowers who had adverse credit feel that getting a mortgage would be almost impossible or at least very, very difficult.
“I think that’s what we need to do better as an industry to make sure that these customers are seeking advice because getting a mortgage is possible.”
‘We’re seeing the next generation of adverse credit coming’ – Jannels
Speaking on Specialist Lending Solutions Television in association with Pepper Money in February before the coronavirus lockdown, Jannels noted that mobile phone companies and car park enforcement were particularly strict.
“We’re seeing the next generation of adverse credit coming through, if you cough on your phone bill you’re slapped with a default almost immediately,” said Jannels.
“The biggest increase at the moment we’re seeing is car parking fines. People don’t want to pay a silly little charge because they went into a pet store, and then they’ve got private firms chasing them down.”
Jannels noted that things could escalate quickly and before they know it those parking charges are up to £700.
He added that the biggest surprise was people then buried their heads in the sand and did not think they could find a mortgage – instead dropping onto the lender’s standard variable rate or just not purchasing the property.
Citing its research, Pepper Money sales director Paul Adams noted that many people with credit issues fell into in the prime age of property purchase between the ages of 35 – 44.
“But surprisingly it’s not just the less affluent borrower customer, a lot of these customers, the majority in fact, are associated with the social grades associated with higher incomes,” he said.
“So a good 61 per cent of people looking to buy in the next 12 months were of those social grades where income and earnings aren’t a problem.”
BDMs starting to visit broker offices – Brightstar
Brightstar is also contacting its key lender partners to let them know the distributor will be accepting visits from lenders now it has put procedures and facilities in place.
Speaking on the Brightstar Vlog, Bluestone Mortgages managing director Steve Seal agreed there would be a change in the way lenders worked which could be a challenge for field-based BDMs to adapt to.
“We are seeing some appetite from intermediaries for BDMs to start knocking on their doors again,” Seal said.
“I think we’re a long way off from finding ourselves in the situation where we have BDMs out in their cars all day doing five or so appointments and knocking on brokers’ doors.
“But where certain key firms have established Covid secure environments where they can go in and be safe and continue to maintain that relationship, then we have started to see that and have facilitated that already.
“In a relatively small number but I’m sure that will grow over the coming months,” he added.
Very strict rules
Brightstar CEO Rob Jupp (pictured) who was hosting the Vlog noted that the firm was taking steps of its own to start bringing lenders back in to visit.
“I will be writing out to all our key partners with a scheme of work we put together in the last month,” Jupp said.
“People at Brightstar and Sirius have put together a really good document, track and trace app and full scheme of work for lenders’ key account people to come back into our businesses within very strict rules.
“It may be for some people, it may not be for others, but certainly where that key partnership has been really important and we want to make sure that those that want to come can do so – as much for the benefit of mental health as to get back into doing the job well.”
Discussing plans for potentially returning staff to offices, Seal noted that while Bluestones offices were open having had significant mediation work completed, he had told his teams they were free to work from home until the end of the year.
“We’ve gone out and researched with colleagues… and largely people want a balance between home and office working in the long term,” he said.
Seal added that productivity had increased with people working from home.
“We found during this period where we’re doing record volumes, I would argue we have seen increased level of productivity from people working from home where they don’t necessarily have distractions from working in an office environment.
“The challenge is preventing that level of isolation that might occur and keeping people feeling embedded in the business – but we’re very comfortable with the working from home principle,” he added.
Vida Homeloans managing director of mortgages Louisa Sedgwick and Pepper Money sales director Paul Adams were also taking part in the call.
They had both conducted research around their firms about when people should start returning to offices and how that should take place.
Sedgwick explained that Vida was in the process of whether to bring people back into offices for next three or four months or to keep them working from home if it works for them.
Its survey of staff had found around 90 per cent were very comfortable working from home but the remainder were potentially hampered by their individual situations.
The lender already had underwriters working from home but Sedgwick noted there could be compliance issues which needed to be taken care of.
Pepper’s Adams noted that with three sites it was likely to be a very complex scenario for the lender and many decisions may be taken on a team or individual basis.
“We’re engaging with a third party to help on a consultancy basis,” he said.
“It’s not going to be one size fits all.”
“One of the things that causes anxiety is uncertainty. We’re not going to suddenly say ‘everyone back’.”
And Adams emphasised that interaction with broker firms will look different because of changes in the way people work which can make them more productive.
Watch the rest of the Brightstar Vlog by following this link.
Vida returning to lending ‘imminently’
The lender said that completing its £350m securitisation last month had enabled it to begin plans for re-entering the market ‘imminently’.
Pepper Money has also revealed it is in the process of conducting a securitisation which should help it increase liquidity and lending volumes later in the year.
Weeks rather than months
Speaking on the Brightstar Vlog, Vida Homeloans managing director of mortgages Louisa Sedgwick said: “We’re getting ready to come back into the market imminently, so you will see something over the next few weeks.
“We’ve been working on products, pricing and proposition, making sure it’s ready to come back with something that might be pretty sexy when we do come back.
“And also working on a new sales team structure to compliment not just the new virtual trading world but also compliment what we want to do as a business going forward.”
Sedgwick noted that the team would be coming back from furlough over next couple of weeks and the lender was finalising and defining what it wanted to do on return.
“So it is just a case of watch this space, we haven’t formed a view on the date but we are weeks, rather than months away – so I’m really excited,” she added.
Capital markets open
Discussing the state of the securitisation market and its importance to the specialist lending market, Sedgwick was generally positive and credited Kensington Mortgages with being the first lender to get it going.
“I think the capital markets are definitely open, they are very keen to do trades which has been seen in the last few weeks,” she continued.
“Securitisation markets re-opening and relieving some of the liquidity issues is going to drive some great opportunities in the specialist market.
“The credit risk piece hasn’t yet played out, but capital constraints have and I think you’ll start to see some really good competitive products out there, which will enable some of the specialist customers to come back into the market,” she added.
Pepper Money sales director Paul Adams joined Bluestone Mortgages managing director Steve Seal alongside Sedgwick on the session hosted by Brightstar CEO Rob Jupp.
Adams noted that Pepper had started the year “like a train” and was well on track to reach lending targets, however he agreed that liquidity had been one issue slowing the market and the lender was in the process of releasing more funding as it targeted a big push towards the end of the year.
“We’re working on a second securitisation now which will help building our appetite and volumes towards the end of the year,” he said.
Seal added that since Bluestone returned its full product suite to market in June the lender had seen very high demand and was posting record months.
“Since then we’ve seen great appetite, we’re doing record volumes which is brilliant – and we’ve had great support from the broker community,” he said.
Watch the rest of the Brightstar Vlog by following this link.
Pepper resumes BTL purchases including credit impaired borrowers
The lender is also opening its landlord purchase offering out to borrowers with previous credit impairments.
Its Pepper Light range will be available to customers who may have experienced defaults, missed payments and arrears, but who have not received any County Court Judgements (CCJs).
Offer validity is being reinstated to 90 days after it was reduced to 60 days during the lockdown.
“The improving outlook has enabled Pepper Money to reinstate the longer offer period, in addition to the launch of new products,” the lender said.
Specialist lending balancing act
Sales director Paul Adams explained that specialist lending in the current environment was a balancing act as demand remains high, but the uncertain economic environment means every case requires extra underwriting scrutiny.
“And so, we have taken steps to protect the service we provide our brokers, while also ensuring they have access to the most appropriate solutions for their clients,” he said.
“When the lockdown was fully enforced, it was difficult to see how there would be tenant demand for new buy-to-let properties and so this was an area we pulled back on to free up greater capacity in other areas of our lending.
“Now, however, feedback from the market shows that tenant demand has remained stable, as has demand from buy-to-let investors and so we are really pleased to be able to support these borrowers with the return of our mortgages for purchases.”
He added that the lender would continue to review areas of demand along with the latest economic conditions and lockdown restrictions for its proposition.
Pepper tightens income evidence requirements and rejects furloughed borrowers
The lender wants brokers to supply evidence that residential remortgage applicants are “not experiencing financial difficulty”, and remortgaging landlords must be receiving rent from tenants.
Pepper is also not accepting any mortgage applications from borrowers who are receiving financial assistance through either of the government’s income support schemes.
These are the Coronavirus Job Retention Scheme (CJRS) for furloughed employees, and the Self Employment Income Support Scheme (SEISS) for the self-employed.
Furthermore, it clarified the limitations for borrowers on a mortgage payment holiday with their current lender. Pepper will not accept buy-to-let (BTL) purchase or let-to-buy applications in this scenario.
More questions and evidence
The moves were part of a wider criteria update published by the lender that also covered detailed requirements for self-employed income.
The lender’s notification said: “At Pepper Money we believe it’s important to be transparent about how we assess your clients’ applications.
“Due to the on-going effects of Covid-19, we have made some changes to our underwriting requirements.”
It added that “all applications will continue to be manually underwritten and we will be taking into account the current economic environment. This is likely to lead to an increase in questions and/or evidence requested.”
Self-employed applicants will now be required to produce full business accounts.
Pepper said that SA302s will only be accepted in addition to the full business accounts.
SA302s are not acceptable proof of income on their own but will be requested where the accounts have been prepared by an accountant who does not appear on our list of accepted qualifications.
It may also ask them to confirm dividends which do not appear in the business accounts.
Pepper also explained the further evidence needed to confirm mortgage and rental payments for remortgage applicants.
“For residential remortgage applications, we will require you to verify that your customer is not experiencing financial difficulty and is able to meet their monthly repayment,” Pepper said.
“Please supply a copy of the latest bank statement evidencing payment of the last month’s mortgage payment.
“For BTL remortgage applications, you will need to verify that your customer has been receiving rental payments from their tenants.
“Please supply a copy of their bank statement evidencing receipt of the rental payment for the last month, in addition to a copy of the assured shorthold tenancy (AST).”
Pepper Money sales director Paul Adams told Mortgage Solutions: “The economic outlook remains uncertain and so, as a responsible lender, it is only right that we apply the appropriate level of underwriting scrutiny to applications to fully understand individual customer circumstances.
“It’s also important that we are completely open and upfront with brokers, which is why we have so clearly communicated the guidance to which our underwriters are working.
“Our approach to lending remains fundamentally the same as it did prior to the Covid-19 crisis, with hands-on underwriting to provide easy and affordable solutions for clients with complex circumstances, but there must clearly be some extra considerations made as part of the lending process, and it is only right that we are transparent about those considerations.
“While we must be mindful of the uncertain economic environment, we are also very positive about the future and have a number of exciting plans in pipeline to expand and extend our proposition into new areas, so watch this space.”