Firm Foundation for New Lender

e n d e r D r o lfi
0
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
Foundation Home
e\wbue
o
ytle
-lnder
Loans
(FHL)
launched at the end
of February and so
far is very happy with
E X E C U T I V E S U M M A RY
Foundation Home Loans (FHL) is the new buy-to-let lending operation of mortgage servicer
Paratus AMC, formerly known as GMAC-RFC, which was the 10th largest lender in the UK in
2007 but stopped lending in 2008. FHL expects to move into residential near prime lending
next year.
the way business is going and the re
Paratus bought GMAC in October 2010 and restructured the company. It is
ception it has received in the inter
mediary 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 - Para-
financially strong with £67 million in capital and £18 million In cash which it is
tus 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 cred
it curve from near prime down to
heavy adverse.
using to fund FHL. Future funding will come from regular securltisations and the
first transaction is likely to be early 2016 for around £250 million.
The FHL product range is aimed at Investors from first-time landlords to semi-professional
and full-time landlords. There are two product ranges - prime and light adverse - FHL
manually underwrites ail loans. Some of FHL's USPs include no income requirement, it will
lend up to age 85 and there is no restriction on studio fiat sizes.
FHL's lending decision is based on the property, the yield and rigorously stress
t e s t i n g t h e r e n t a l i n c o m e . M a x i m u m LT V I s 7 5 p e r c e n t a n d fi r s t - t i m e l a n d l o r d s
need to show they have six months' worth of payments.
FHL sells its products through specialist distributors (15 at present but expanding) and
conducts thorough due diligence before signing up a new distribution partner.
scorecard. Also, we have been able
range pitching itself as a specialist
lender, even though its rates are com
mensurate with mainstream providers.
Tlrere are two product ranges -
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
prime and light adverse. Prime rates
start from 3.76 per cent and these
products are for the customer that
have fared."
Many of the 70,000 buy-to-lct
loans GMAC originated have re
d o e s n ' t fi t t h e s t a n d a r d m o u l d . F H L
F H L ' s c h i e f e x e c u t i v e o f fi c e r
deemed and most of them were sold
Hans Geberbauer explains the sig
nificance of this: "What that gives us
is a unique view of how these loans
but Paratus continues to receive per
formance data from the buyers so
has a full picture of all the loans. Of
actually perform and how they per
formed in a major dislocation period
the 11,000 or so loans that
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
were kept on the books,
been satisfied over two years ago,
1,500 arc still live and
they can come onto our prime prod
uct. If you have something historical
- like the experience from 2007 until
about two years ago. So we know ex
actly how that plays out.
"And it's worth bearing in mind
that there can't be many other buy-to-
the others were re
deemed or in some
cases
were
repos
sessions.
you can still be a prime customer."
The FHL range is aimed at the
Product
semi-professional and occasion
al landlord who has perhaps two
or three properties, but it is also for
range
fi r s t - t i m e l a n d l o r d s a s w e l l a s l a n d
let lenders who have that kind of data-
set 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 buyto-iet lending as they do not differ
entiate between buy-to-let and own
er occupied loans. So as a new lender
Hans
Geberbauer,
Foundation
Home Loans'
CEO
FHL set about
lords with substantial property port
folios. The later was not really what
FHL was originally aiming at but it
turns out that's also where the prod
designing its
product
vestors who already have a significant
Armed with all
this
wealth
of
mortgage data,
you have no way of calibrating your
August 2015 ■ Mortgage F
uct fits. It fulfils a need for some in
portfolio and mortgages with a num
ber of other lenders.
33
Paul says: "We allow our bor
rowers to have unlimited mortgages
with other providers. Lenders that
operate more in the prime space
tend to restrict their borrowers to
F O U N D AT I O N
a maximum of two or three proper
ties; or they've got large portfolios
and they just need that extra liquid
ity. We didn't actually plan for this
but it's a nice consequence of that
HOME LOANS
piece of criteria."
No income
Some buy-to-let lenders require the
wrote business at less than 125 per
borrower to have a minimum in
cent the likelihood of default went
come of, say £25,000, but FHL does
not have any such stipulation and is
also comfortable lending to the self-
up significantly.
employed.
Hans explains: "If you are lend
ing on a single property, what docs a
£25,000 income really prove, espe
cially 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
ings lifetime trackers which are un
interest in a stressed environment,
plus of course the additional costs
being a landlord?"
Paul adds: "We look at the prop
erty, 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
Borrowers
"There will be people out there who
have legacy issues from the credit
crunch who are not aware that they
Hans says he is a little bit con
could get a buy-to-let mortgage,"
cerned with some lenders offer
says Paul: "The fact that there are
stressed: "Those rates could go up
but no stresses have been applied
at all to the rental income coverage.
products on the market designed for
their particular circumstances will
We are watching that one closely but
take some time to filter through. We
are taking on regional account man
have no intention of following."
agers so that we can remind distrib
First-time landlord
USPs (unique selling points) are and
FHL's first-time landlord product
to build relationships.
utors, on a regular basis, what our
is priced slightly higher than the
general range and, as well as a 25
"One of our USPs is that we don't
have a restriction on studio flat size.
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 de
Many of our competitors would not
look at 30m^ but if the valuer con
fi r m s t h a t t h e r e n t a l i n c o m e m e e t s
our stress test then we will happily
lend on flats below this size."
fault for first-time landlords, so it's
Distribution
a slightly riskier proposition.
Paul says: "With a first-time
FHL sells its products through spe
cialist distributors or what used to
6 per cent. That is quite high com
landlord there could be an element
be known as packagers. It started
pared to other market stress tests,
which are around 5 per cent.
"With the relaxation of the pen
sion 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
of naivety in respects of what would
with nine distributors and that has
happen if there was a void. There
now extended to 15 with more in the
fore, we want to see six months'
pipeline. Tlie lender conducts due dil
85."
LT V
FHL is fairly conservative on loanto-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 bor
rower's credit is.Tliere is another sig
nificant tipping point at 80 per cent
LT V. "
He also points out that the 125
per cent rental yield rule of thumb
is borne out in the firm's data. Hans
c o n fi r m e d
34
that
where
GMAC
worth of payments in a bank ac
count. We want to make sure they
Paul Brett,
are aware of the risks and their re
business
sponsibility as a landlord.
As for ofTering advice to land
lords, Paul states: "Tlie distributors
that we deal with have experi
ence in making sure that there
is an education process for
development
their clients. We are actu
director
igence before signing up a new dis
tribution partner, which means it has
turned a few distributors away.
Paul comments: "As far as the dis
tributor goes, our application process
to be a distribution partner is akin
to an FCA application and is
very thorough. This encom
passes things like a disaster
ally working on producing
recovery plan and conti
nuity. We must determine
some information that
whether our distribution
we will be giving out with
our offers, especially to
partners have had the fore
sight to think about their
systems and controls."
Hans adds: "The speed
with which people respond
is very interesting. One of our
o u r fi r s t - t i m e l a n d l o r d s
because we want to make
sure our applicants are
doing this complete
ly with their eyes
open."
top distribution partners re
turned everything, which was a
hefty amount of work, within two
days - that indicates they run
a very tight ship. Others
took eight weeks to
ender Proti e
get the paperwork together. Many of
our distribution partners have traded
through the crisis and their commit
ment to quality and doing the busi
ness is very heartening."
Mortgage arrears have halved in five years at Paratus
Paratus AMC has worked hard to get the
know what we are doing on the servicing
arrears on the loans it services down and
has had more success than it is given credit
side, we would like to be doing as well as
the Co-op but we our outperforming the
for, say Hans Geberbauer, who is also chief
other shelves."
Growth
executive officer of Paratus as well as Foun
FHL docs not intend to rush into
dation Home Loans.
Fitch Ratings recently upgraded Paratus
UK Special Servicer Ratings from 'RSS2' to
business as Hans explains: "We want
in the second quarter of 2011, Paratus
to make sure from the start that we
brought all business processing in-house
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."
'RSS2-F'.
Paratus manages a mortgage book of
from HML but it continued to use HML's
over 27,000 loans with a value of £2.8
Jade system, Earlier this year Paratus mi
grated all of its loans onto a new platform
supplied by Phoebus Software.
Hans points out: "As the Mortgage Market
billion, most of which were securitised pre-
2008 through the RMAC shelf. According to
Fitch, Paratus AMC offers a 'good mixture
of resolution methods, with a clear focus on
index published by Fitch clearly shows, we
individual borrower situation and afford-
have reduced our arrears, they have almost
ability'.
halved since we began servicing the RMAC
*ln 2013 a deal was taken out of
securitisation; and repossessions are just
as low as the Co-operative Bank* and lower
than our peers. The big picture is that we
The Co-operative Bank hence the sudden
downward movement in the graphs
There are two reasons for this ap
proach, say Hans: "Firstly, the mar
ket is heating up a little and we don't
want to rush after some of the looser
criteria.
Non-Conforming RMBS Three-Months Plus Arrears Including Possessions
(%)
• Kensington Group pic
• Paratus AMC Limited
• Preferred Mortgages Limited
• Southern Pacific Mortgage Limited
• The CcMjperative Bank PLC
30
"Secondly, we want to maintain
our service proposition so distribu
tors 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 prin
ciple. Hie 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 string
2005
2006
2 0 0 7
2008
2 0 0 9
2010
2011
2012
2013
2014
Source; Fitch
Non-Conforming RMBS Cumulative Possessions
ing brokers along as they may use
the application to reach a target but
• Kensington Group pic
> Paratus AMC Limited
• Preferred Mortgages Umited
■ The Co-operative Bank PLC
• Southern Pacific Mortgage Umited
if a better loan completes first they
will find a reason to reject this one."
Financial strength
Paratus spent four years restructur
ing 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 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
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Fitch
Hans comfirms: "We expect to
be in owner occupied lending next
year. We will look at our owner oc
cupied data and analyse that in the
same way as the buy-to-let data. We
though has made no decision as to
w h e t h e r i t w i l l m o v e i n t o t h i s s e c t o r.
If it did, it would be once the resi
dential lending arm was up and run
ning and after the seconds market be
comes regulated in 2016. GMAC did
2016 for around £250 million.
would need to do more work around
Ict lender to start with as it is easier
affordability checking, which is es
sential in owner occupied lending.
The type of lending will probably be
near prime lending, it won't be heavy
not write second charge mortgages so
What's next?
Paratus opted to launch a buy-to-
than launching a residential lender
adverse.
regulated at the moment.
ing" the second charge market al
building its business and is look
ing forward to growing its lending
proposition. |
- not least because buy-to-let is not
Paratus is also "actively monitor
August 2015 ■ Mortgage Finance Gazette
this would be a new area for Paratus to
venture into.
So for now, FHL is steadily
3 5