The interview
Mortgages is deliberately drawing on the shape of the current buy-to-let market and the lessons that have been learned over the past two years.
“I would say Paragon as a business
has really influenced Precise Mortgages – if you look at their business model, it’s good. We have emulated a lot of the things that Paragon got right over the years. I would like to say that lots of things we do are very similar. How we differ will depend on what they come out with as and when they return to the market.” With such comparative movement in the buy-to-let sector, Precise Mortgages will be in good company, but Cleary says the team is unworried about competition. “The buy-to-let market was £44bn at its peak. It’s now £8bn. We don’t need to compete with anyone. I think there’s space for all the lenders which have recently launched in this space. “There is so much demand out there
that different lenders can enter into slightly different segments and fulfil their volume requirements. I don’t think there is any necessity to compete head on head with any lender in the sector at the moment. Why would you do that in an undersupplied market?”
HigH qualiTy
The specific segment Precise Mortgages has set its sights on is high credit quality, and with that in mind it has put a minimum salary of £50,000 into its criteria, along with the decision not to lend to any borrower with an adverse credit history. The maximum loan value is £300,000. “Right now, we have no intention to loosen our criteria on the minimum salary,” explains Cleary. “We have a credit management committee whose purpose is to monitor the macro economic climate, credit risk issues and to recommend to the board what our criteria should be.
“I’m not saying we will never change our criteria, we almost certainly will change criteria in line with our risk appetite and wider economic conditions, but at the moment, there are no plans. What I can say is that we do review criteria every month with that committee.”
26 mortgage introducer JUNE 2010
The desire to control the credit quality of its book is high on the list of priorities for Precise Mortgages. “We’re building on the expertise we have assembled over the past eighteen months at Exact,” says Cleary. “We’ve performed due diligence on £5.2 billion of mortgages for multiple banking clients which has given us considerable insight into the current shape of the mortgage market in the UK. “We intend to write quality buy-to-let business, and believe there is a strong demand from creditworthy investors for our product. “We have contracts with Experian and Equifax and our IT systems pull data from both sources to check credit scoring on applications. That allows us to give brokers a decision in principle pretty much immediately.
“Our team of underwriters will then
corroborate application details to verify all of the information on file, at which point we can then tell the broker if the application has been successful. Precise Mortgages is keen to ensure controlled credit quality.”
Much of the intermediary market has been concerned that lending based solely on credit scoring is preventing quality borrowers from getting a loan. But Cleary says the credit scoring Precise Mortgages will use is based on borrowers’ credit information at today’s date. “Credit scoring is based on 30 years of industry learning. Why on earth would you throw that away? You adapt your learning and improve the process.” Precise Mortgages has checked its
score cards, which Cleary said had been consistently used during the downturn as part of Exact’s due diligence product, which has reviewed 36,000 loans with a total value of £5.2 billion. “The score cards used in the Precise underwriting process have been improved and verified throughout the credit crunch to cope with the current environment.” In a further effort to mitigate the
lender’s exposure to risk, the board has decided to work with a limited number of suppliers. Lloyds Banking Group- owned surveyor, Colleys, is signed up to
do physical valuations on all properties Precise Mortgages lend on. The lender has also said it plans to work with solicitors Shoosmith and Goldsmith Williams.
The decision to limit business partners is down to fraud mitigation. “We’ve worked with these guys
before,” explains Cleary. “We know them, and we know they do quality business.” Loan book quality is also important as
Precise Mortgages wants to establish a reputation for writing quality assets, which will command a good price in the wholesale markets eventually. He stresses that currently, Precise Mortgages has no plans to securitise its loans and they are not reliant on those markets to finance new lending, but the Precise Mortgages board is open to that source of funding in the future. “The securitisation model is good for this market, but it just needs to be policed and controlled properly by the authorities,” says Cleary. “They need not to allow some of the things that happened in the last market to happen in the future. “The problem was that securitisation
turned into a risk transference model when it was designed to be a funding model. But it became so sophisticated that people were using it just to move risk around. It wasn’t about funding any more.
“Fundamentally securitisation was good. The way in which it was used was bad. So we need to regulate that.” The future of securitisation is still
unclear, and despite some successful transactions, there is yet to be official comment from the authorities on what the model should look like in the future to control risk and protect against another crisis.
“Keeping risk on the originator’s book to encourage them to control the risk they write is one way of raising confidence in the securitisation model,” says Cleary. “But I think that is largely covered already in the Mortgage Market Review. I’m assuming that will become enshrined in the regulations at some point. But also, I think regulators need to consider how they play a part in making securitisation more transparent
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