the UK to securitise mortgages in 1987 and it was one of the most prolific issuers of structured mortgage bonds in the UK market,” explains Heron. “That experience combined with the performance of the deals themselves, which has been clear for all to see, has provided that confidence to investors.” The performance can be seen in arrears


figures. The number of mortgage accounts more than three months in arrears across Paragon’s portfolio of buy-to-let assets is falling, says Heron, and is currently just 0.86% of the book - significantly below buy-to-let market peers and also the wider mortgage market measured by the CML which put 3-month plus arrears at 2.7% at the end of Q2 2010. “We’ve been thrilled with the way that


book has performed,” says Heron. “We’ve always had a very risk-averse approach to lending and we’ve come back to the market with that kind of approach again.” This approach is what investors will buy


into, says Heron. “We believe it’s necessary to have a


robust assessment of the individual you’re lending to – not only do you need to satisfy yourself that a borrower has a good credit history you also need to satisfy yourself of their competence or potential competence as a landlord. “We collect a lot of information on them,


their other economic activity, proof of income, rental accounts, ask them for a forward looking business plan, and when we’re advancing larger sums, we sit down with them and interview them. “That’s very different from the short


form process in the rest of the market. We were always different from the automated underwriting. We really want to eyeball the applicant,” he says. Another difference in the underwriting


process has been the fact that Paragon chose to maintain a large team of its own paid surveyors. “Buy-to-let is different from a traditional


owner occupier property,” Heron explains. “Yes you have to assess it for its condition, value and location, but the critical thing is it represents an ongoing sustainable rental proposition. “It sounds obvious but it’s not


necessarily the way other lenders approached underwriting in the past. Our


surveyors have a vested interest in getting this right.” The products Paragon has returned to


the market with also reflect this risk-averse approach. Affordability has been one of the most important constituents for Heron, whose team has set the lender’s rental ratio (rental income versus mortgage payment) at 130%. That’s 5% higher than the rest of the market. Affordability testing is also stressed to a


mortgage interest rate environment of 7%. “Our view is that we’re at the bottom of


an interest rate cycle,” says Heron. “We’re trying to make sure that our customers can afford the loan when interest rates increase. “Paragon thinking is always risk


averse. A mortgage lender or bank should not need a regulator to tell it to lend responsibly. Ultimately, irresponsible lending results in problems not just for the people who have borrowed the money but the people who have lent it as well.” This aversion to risk is inherent in


Paragon’s outlook says Heron. And it is ultimately why he is confident that investors will want to buy bonds backed by the mortgages Paragon originates.


A PersuAsIve logIc Aside from the specific approach to lending and underwriting that Heron subscribes to being on Paragon’s side in the fight for funding, there are also persuasive fundamentals underpinning the buy-to-let market. “Overwhelmingly, the logic behind the


product is irresistible,” says Heron. “I think the outlook for buy-to-let is bright indeed. More importantly, it’s sustainable. Buy-to-let helps to provide an absolute, fundamental staple of life: homes. “The sector has performed extremely


well through the credit crunch but nevertheless, supply of buy-to-let mortgages has been disproportionately impacted,” explains Heron. “I think that is because all of the support measures that have been available to lenders through the financial crisis have been directed at major banks, financial institutions and consumers - not specialist lenders. “But in spite of the severity with which


the credit crunch hit buy-to-let, compared to other specialist products buy-to-let has


maintained a momentum that compares very credibly with adverse mortgages, self-certification, even first-time buyer mortgages.” It’s down to demand says Heron.


Around 14% of the UK population rent privately - up 50% in 10 years. Owner occupation has peaked and social housing sector has also been under pressure. It’s become more difficult for people to own their own home and in some respects it’s become less attractive through the financial crisis - potential buyers have seen the volatility of house prices. The UK has also been faced by a wide


range of social and economic factors that are driving the choices people are making about where and how they live. The scale of higher education; the rate of inward migration, particularly from the European Union; the career choices made by young people who are much more willing to move for the job they want than was ever the case in the past. “You’re dealing with quite material


changes in behaviour particularly among young people,” says Heron. “All of that drives the need for more affordable, more flexible housing. A private rented sector delivers that.”


comPeTITIon However compelling the theory behind buy-to-let though, in practice the market has suffered disproportionately since 2007. Gross lending in the buy-to-let sector in 2007 was £44.6 billion. Last year that dropped a massive 81% to just £8 billion. The market has been dominated over


the past two or three years by Nationwide through The Mortgage Works and Lloyds Banking Group through BM Solutions. Between them, they have accounted for 80% of the buy-to-let lending that has been done. “We’ve been locked down over the


last couple of years which has been frustrating because Paragon is a fabulous business,” says Heron. “It’s been irksome to have to stand on the sidelines and watch certain lenders carve the market up between them, particularly when some of them have been in a position to do that because they’ve been supported by us as taxpayers.” There has also been some limited ►


mortgAge introducer DECEMBER 2010 29


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