Pepper aims to spice up specialty loans
Close to prime and non-compliant mortgage lenders are rare in the field despite the clear demand from potential borrowers with less than perfect credit histories.
This is where Pepper Home Loans fits in. The new lender was launched last month and will target residential and rental borrowers who have had a past “credit event”, be it CCJs, defaults or arrears.
Now is a good time to enter the market, says Pepper CEO Richard Klemmer, who knows a thing or two about specialty lending after being a director at Preferred Mortgages and Future Mortgages during the heyday of subprime mortgages. He explains why Pepper got into lending from its mortgage service roots.
Four key indicators
There are four key metrics Pepper looks for when embarking on new loans: demand, supply, business understanding, and funding.
Klemmer explains: “We believe there is substantial demand in the UK for specialist loans. So if there is demand, is there a good supply? If the supply is low or underdeveloped, we think this is a great opportunity for us.
“We also want to make sure we have a good and solid understanding of this market, both from an asset and operational performance perspective. In the UK, through our service business, we have a fantastic overview of specialty mortgages as we have 80,000 insured and have been doing so for years; So we benefit from real, in-depth, and rich data to exploit and the ability to understand performance metrics and credit risk. We can really analyze what drives performance and demand for these types of products.
“And finally, the funding. All of our activities are funded by the wholesale market, with the exception of South Korea. We have a very well developed securitization program within the group called Pepper Residential Securities. We issued 17 securities dating back to 2003 and issuance continued throughout the Global Financial Crisis (GFC). In addition, we have historically sold bonds from our securitization program in North America as well as in Europe and have developed a strong stable of investors. It gives us a lot of confidence that we can raise capital to fund our lending activity. “
Klemmer says these four indicators in the UK are all positive. The GFC has caused many people to now have some form of adverse credit and
Klemmer refers to research from the Debt Advisory Center, which shows that 1.7 million potential borrowers do not qualify for a mortgage due to their credit history and criteria set by traditional lenders.
“What we’re seeing on the supply side is a traditional banking industry that’s increasingly automated and quite rigid in the way it analyzes credit,” says Klemmer. “The advent of the mortgage market review has taken away the flexibility of how you assess affordability and has become much more restrictive, which isn’t necessarily a bad thing, but it has changed the way products are designed.
“And then we look at the niche sector of the market trying to help borrowers who have had adverse events in the past and the number of providers is slim on the ground. Before GFC, there were 25 or 30 specialist lenders doing business over £ 30 billion a year. Today there are only a small number in this space and we believe it is worth somewhere between £ 3 billion and £ 5 billion.
“The trauma of people going through a great recession has led to a perfect storm from a lender’s perspective – a tough economic downturn and limited supplies mean now is the time to start a niche lender. There is a huge latent demand from customers who have had credit problems in the past, but not now, and this is the space we want to fill.
Pepper Home Loans offers a range of near premium residential mortgage products up to 85% of loan value, which are also available on rental loans up to 80% LTV. Klemmer says an adverse rental purchase is quite unusual in the UK market, but Pepper Home Loans will guarantee rental investors who have had the same type of adverse credit events in the past as consumers looking to buy their own homes. Pepper rental loans are for individuals who want to invest in one or two properties.
The product line is a mix of trackers on Libor and fixed rates, interest only and in part, ie. 60 percent interest only and 40 percent repayment.
At launch, residential tracker prices close to premium start at 3.35% and non-compliant tracker prices start at 4.27%. Lease purchase trackers rates for a start close to the premium at 3.90% and non-compliant lease purchase trackers from 4.55%.
Through its third party mortgage management business, Pepper has the advantage of understanding how clients behave and behave in a tough economic cycle. A good predictor of future behavior focuses on the proximity of adverse credit events as opposed to the more traditional “how many adverse events did they have for how much”.
Most lenders look at metrics like CCJ counts and defaults to assess credit risk, but Pepper’s perspective is too rigid.
Klemmer says, “We are focusing more on the time since the customer had this credit event. The default is usually related to an event in your life such as an interruption of income, loss of employment, illness, divorce. The event is less important to us than trying to find a cause and an effect. You often see that when the disruption stops, the customer’s payment behavior becomes the same as before the event. If the event is behind them, it no longer affects their ability to pay off a mortgage.
“It’s the distance between the event and now that is most important, so the product line is designed around proximity to the event. We will become more robust with the product throughout the distance between the event or events.
Pricing starts six months from the end of the event, then 12, 18, 24 and 36.
When people’s debt exceeds £ 2,000, a primary insurer will look into the case in more detail. and all refusals will be reviewed.
Pepper will also take into account past bankruptcies, IVAs, and those that have been taken over, but there must be a six-year gap since the event. From the point of view of financing the capital markets, it becomes unprofitable to finance this type of loan, but this is possible according to individual cases. Debt management plans and payday loans must be at least 12 months old.
Pepper’s loans will be made through intermediaries – directly authorized, packers and networks. The lender held focus groups with intermediaries and one problem that kept coming up was the difficulty of communicating with the real decision makers within the lending companies.
Klemmer explains that all intermediary partners will be able to speak directly to the underwriter who will hold the loan throughout the process.
“It encourages openness and we believe it’s more efficient and will bring better results for the middleman and ultimately the customer.
“In the first half of this year, we piloted our technology platform, the application portal and the subscription procedures. We started with Brightstar, which has been very useful, and has gradually brought in new mid-tier companies. By the end of the year, we plan to have a large base of channel partners who will bring them in methodically over the summer so as not to overwhelm the back room.
The Pepper group wants to be a significant player in each of the sectors in which it operates and aims to be in the top quartile. In the UK, for example, Pepper is the second largest provider of mortgage services and is growing rapidly. Kleemer says the aspiration for specialty loans is exactly the same, and Pepper Home Loans wants to be in the top three for specialty lenders.
But it doesn’t stop with mortgages, as Kleemer explains: “Our goal is to expand the offer so that over time we will introduce other loans such as auto loans, secured loans and unsecured. We started with mortgages because it’s what we know best, but we see similar attributes in these areas of finance as in mortgages because people have bad credit but still want a car loan.
“The other lending areas will be in a year or two, but we have a big machine in the UK that is scalable. We can create, process, manage and service a variety of different asset classes.
Although Pepper UK now has a small office in Savile Row, most of the workforce is moving from Kensington to much larger and more profitable premises in Uxbridge, which they may become as they develop. expansion of the business.