Firm foundation for new lender
Joanne Atkin talks to Foundation Home Loans’ CEO Hans Geberbauer and business development director Paul Brett about the new buy-to-let venture and future lending plans as it analyses a wealth of mortgage data to shape its mortgage proposition
New buy-to-let lender Foundation Home Loans (FHL) launched at the end of February and so far is very happy with the way business is going and the reception it has received in the intermediary market.
FHL may be a new lender but it is not exactly a start-up business. It has risen from a parent company with bags of experience - Paratus AMC. Pre-credit crunch it was known as GMAC-RFC and in 2007 was the 10th largest lender in the UK and the biggest specialist lender.
What Paratus has to its advantage in creating a new lender is a huge amount of mortgage data that it has been analysing in order to shape its buy-to-let products for FHL.
GMAC wrote over 420,000 mortgages from 1998 to 2008, and 70,000 of these were buy-to-let loans. They were written across the credit curve from near prime down to heavy adverse.
FHL’s chief executive officer Hans Geberbauer explains the significance of this: “What that gives us is a unique view of how these loans actually perform and how they performed in a major dislocation period - like the experience from 2007 until about two years ago. So we know exactly how that plays out.
“And it’s worth bearing in mind that there can’t be many other buy-to-let lenders who have that kind of dataset because, for example, they would have stuck more to prime products. So our understanding of precisely where the risks lie is much deeper.
“You can’t buy a score card from the credit reference agencies on buy-to-let lending as they do not differentiate between buy-to-let and owner occupied loans. So as a new lender you have no way of calibrating your scorecard. Also, we have been able to score to see what happened to the applications we rejected and the people who didn’t take up GMAC offers to see how those applicants have fared.”
Many of the 70,000 buy-to-let loans GMAC originated have redeemed and most of them were sold but Paratus continues to receive performance data from the buyers so has a full picture of all the loans. Of the 11,000 or so loans that were kept on the books, 1,500 are still live and the others were redeemed or in some cases were repossessions.
Armed with all this wealth of mortgage data, FHL set about designing its product range pitching itself as a specialist lender, even though its rates are commensurate with mainstream providers.
There are two product ranges - prime and light adverse. Prime rates start from 3.76 per cent and these products are for the customer that doesn’t fit the standard mould. FHL manually underwrites the whole deal.
Paul Brett, business development director, explains: “If the client has had previous adverse credit, such as CCJs and defaults and they have been satisfied over two years ago, they can come onto our prime product. If you have something historical you can still be a prime customer.”
The FHL range is aimed at the semi-professional and occasional landlord who has perhaps two or three properties, but it is also for first-time landlords as well as landlords with substantial property portfolios. The later was not really what FHL was originally aiming at but it turns out that’s also where the product fits. It fulfils a need for some investors who already have a significant portfolio and mortgages with a number of other lenders.
Paul says: “We allow our borrowers to have unlimited mortgages with other providers. Lenders that operate more in the prime space tend to restrict their borrowers to a maximum of two or three properties; or they’ve got large portfolios and they just need that extra liquidity. We didn’t actually plan for this but it’s a nice consequence of that piece of criteria.”
Some buy-to-let lenders require the borrower to have a minimum income of, say £25,000, but FHL does not have any such stipulation and is also comfortable lending to the self- employed.
Hans explains: “If you are lending on a single property, what does a £25,000 income really prove, especially in London where that amount doesn’t add much credit coverage to your lending proposition? This is why we have decided to focus on the property itself, can it generate a clear yield which can cover the interest in a stressed environment, plus of course the additional costs being a landlord?”
Paul adds: “We look at the property, the yield and we rigorously stress test the rental income. It is something both the CML and the FCA wants. On our prime range we stress test at 5.25 per cent and on our light adverse we stress test at 6 per cent. That is quite high compared to other market stress tests, which are around 5 per cent.
“With the relaxation of the pension rules, we will lend up to age 85; there may be potential first-time landlords aged 65 or over who want a term that will take them to age 85.”
FHL is fairly conservative on loan-to-value and will lend a maximum 75 per cent LTV on prime business and 70 per cent on light adverse.
Hans says: “Our analysis of 70,000 GMAC buy-to-let loans shows a definitive tipping point at 75 per cent LTV with the likelihood of default going up very significantly irrespective of how strong the borrower’s credit is. There is another significant tipping point at 80 per cent LTV.”
He also points out that the 125 per cent rental yield rule of thumb is borne out in the firm’s data. Hans confirmed that where GMAC wrote business at less than 125 per cent the likelihood of default went up significantly.
Hans says he is a little bit concerned with some lenders offerings lifetime trackers which are unstressed: “Those rates could go up but no stresses have been applied at all to the rental income coverage. We are watching that one closely but have no intention of following.”
FHL’s first-time landlord product is priced slightly higher than the general range and, as well as a 25 per cent deposit, borrowers need to show that they have six months’ worth of payments.
Hans explains: “When we looked back at our data we saw a higher likelihood of a probability of default for first-time landlords, so it’s a slightly riskier proposition.
Paul says: “With a first-time landlord there could be an element of naivety in respects of what would happen if there was a void. Therefore, we want to see six months’ worth of payments in a bank account. We want to make sure they are aware of the risks and their responsibility as a landlord.
As for offering advice to landlords, Paul states: “The distributors that we deal with have experience in making sure that there is an education process for their clients. We are actually working on producing some information that we will be giving out with our offers, especially to our first-time landlords because we want to make sure our applicants are doing this completely with their eyes open.”
“There will be people out there who have legacy issues from the credit crunch who are not aware that they could get a buy-to-let mortgage,” says Paul: “The fact that there are products on the market designed for their particular circumstances will take some time to filter through. We are taking on regional account managers so that we can remind distributors, on a regular basis, what our USPs (unique selling points) are and to build relationships.
“One of our USPs is that we don’t have a restriction on studio flat size. Many of our competitors would not look at 30m² but if the valuer confirms that the rental income meets our stress test then we will happily lend on flats below this size.”
FHL sells its products through specialist distributors or what used to be known as packagers. It started with nine distributors and that has now extended to 15 with more in the pipeline. The lender conducts due diligence before signing up a new distribution partner, which means it has turned a few distributors away.
Paul comments: “As far as the distributor goes, our application process to be a distribution partner is akin to an FCA application and is very thorough. This encompasses things like a disaster recovery plan and continuity. We must determine whether our distribution partners have had the foresight to think about their systems and controls.”
Hans adds: “The speed with which people respond is very interesting. One of our top distribution partners returned everything, which was a hefty amount of work, within two days - that indicates they run a very tight ship. Others took eight weeks to get the paperwork together. Many of our distribution partners have traded through the crisis and their commitment to quality and doing the business is very heartening.”
FHL does not intend to rush into business as Hans explains: “We want to make sure from the start that we make a difference to our distributors by helping them make a difference to the offering they bring to their borrowers. We believe that requires a graduated approach and it has worked very well as we are getting very good, positive feedback.
“Our critical challenge is that the growth curve is going up and the pipeline is growing and we want to maintain that along with a strong service proposition.”
There are two reasons for this approach, say Hans: “Firstly, the market is heating up a little and we don’t want to rush after some of the looser criteria.
“Secondly, we want to maintain our service proposition so distributors can rely on our guidance. If we think the application is a ‘no’ you will hear about it very quickly. We aim for a 24-hour decision in principle. The idea is to minimise the maybes and give the intermediary a chance to get on with contacting the next lender and I think that has gone down well. We have observed that some lenders might be stringing brokers along as they may use the application to reach a target but if a better loan completes first they will find a reason to reject this one.”
Paratus spent four years restructuring the company when it brought GMAC-RFC in October 2010. It has been profitable for four years now and profit from the legacy operation is £4 million a year. The company has £67 million in capital and £18 million in cash which it is using to fund the FHL lending operation.
FHL intends to securitise its loans on a regular basis, a minimum of one securitisation a year, and the first transaction is likely to be early 2016 for around £250 million.
Paratus opted to launch a buy-to-let lender to start with as it is easier than launching a residential lender – not least because buy-to-let is not regulated at the moment.
Hans comfirms: “We expect to be in owner occupied lending next year. We will look at our owner occupied data and analyse that in the same way as the buy-to-let data. We would need to do more work around affordability checking, which is essential in owner occupied lending. The type of lending will probably be near prime lending, it won’t be heavy adverse.
Paratus is also “actively monitoring” the second charge market although has made no decision as to whether it will move into this sector. If it did, it would be once the residential lending arm was up and running and after the seconds market becomes regulated in 2016. GMAC did not write second charge mortgages so this would be a new area for Paratus to venture into.
So for now, FHL is steadily building its business and is looking forward to growing its lending proposition.
Published by Mortgage Finance Gazette