How do companies become mortgage lenders?

[BenJacobs]

How do companies become mortgage lenders? Not just brokers, but actually going to wholesale markets, etc. for funds to lend to homebuyers like high street banks would?

 

[Mark T Jones]

With a big pot of cash and huge expertise in recovery and lending processes (in that order)

Lending money is really very easy indeed

 

[Gordon - Commercial Finance]

Lending money is really very easy indeed

Yes, its making sure you're going to get it back that's the hard bit.

 

[Gordon - Commercial Finance]

If you're lending on mortgages, there is a whole raft of regulation to abide by and be accredited for.
You can lend in the unregulated space - things like unregulated bridging loans, development loans, LTD company asset finance...and the regulation is perhaps a little lighter.

 

[mattk]

Firstly, jump through the numerous regulatory hoops to become a bank.

Next, get deposits by offering an attractive rate of interest to savers.

Now, this is the best bit. Banks can leverage deposits and lend out 5 times as much in the form of loans and mortgages. You can essentially create money out of thin air and charge people interest on it.

Sit back and enjoy the fruits of your labour.

 

[Blaby Loyal]

Now, this is the best bit. Banks can leverage deposits and lend out 5 times as much in the form of loans and mortgages. You can essentially create money out of thin air and charge people interest on it.

Sit back and enjoy the fruits of your labour.

Sounds like something Fred Goodwin or Sir Peter Baring would say.

 

[Gordon - Commercial Finance]

Now, this is the best bit. Banks can leverage deposits and lend out 5 times as much in the form of loans and mortgages. You can essentially create money out of thin air and charge people interest on it.

Sit back and enjoy the fruits of your labour.

Just nipping off to go an apply for my banking licence......brb

 

[Mr D]

Firstly, jump through the numerous regulatory hoops to become a bank.

Next, get deposits by offering an attractive rate of interest to savers.

Now, this is the best bit. Banks can leverage deposits and lend out 5 times as much in the form of loans and mortgages. You can essentially create money out of thin air and charge people interest on it.

Sit back and enjoy the fruits of your labour.

And when they don't have the money to pay out what is asked for... ?

 

[Blaby Loyal]

And when they don't have the money to pay out what is asked for... ?

Don't quibble!

 

[BenJacobs]

Thanks everyone, appreciate the input. Just a few points to clarify if I may – what regulations and accreditations are required for lending on mortgages? It’s not required to become a fully fledged bank to lend though is it? Specialist lenders who go to the wholesale market space for all of their funding don’t operate that way I believe?

 

[Mr D]

Don't quibble!

Northern Rock used to be such a nice place...

 

[Mark T Jones]

T It’s not required to become a fully fledged bank to lend though is it? Specialist lenders who go to the wholesale market space for all of their funding don’t operate that way I believe?

Nope; no need for a banking licence

 

[BenJacobs]

Thanks for clarifying Mark, didn't think so. Do you know the steps a company would need to take to get the accreditation needed?

 

[Mark T Jones]

Thanks for clarifying Mark, didn't think so. Do you know the steps a company would need to take to get the accreditation needed?

No idea I'm afraid - mortgages aren't my thing..

 

[tony84]

It depends on the type of mortgages you want to do.
As I understand it (I could be wrong) there are unregulated lenders, typically some private bridging loan lenders for example. There is also a Mortgage lender called Fleet Mortgages who I believe are not regulated by the FCA (Although they do follow their rules voluntarily) but they only lend on BTL properties or they will do when they manage to get some more money to lend out.

There is loads of information on the FCA website and they are quite helpful if you give them a call.

 

[Financial-Modeller]

Thanks everyone, appreciate the input. Just a few points to clarify if I may – what regulations and accreditations are required for lending on mortgages? It’s not required to become a fully fledged bank to lend though is it? Specialist lenders who go to the wholesale market space for all of their funding don’t operate that way I believe?

You didn't clarify much there.

What do you actually want to achieve?

Mortgage lending is a volume business, and most successful lenders use wholesale markets to scale up, earning low margins on an enormous book of loans.

You seem to be asking how to get regulatory approval to lend, then specifically not use wholesale markets, which would be an inefficient use of your capital.

A banking license enable you to operate as a bank. Most banking activity is not necessary if you just want to lend your own money against residential property, so no, you would not need a banking license.

 

[BenJacobs]

It depends on the type of mortgages you want to do.
As I understand it (I could be wrong) there are unregulated lenders, typically some private bridging loan lenders for example. There is also a Mortgage lender called Fleet Mortgages who I believe are not regulated by the FCA (Although they do follow their rules voluntarily) but they only lend on BTL properties or they will do when they manage to get some more money to lend out.

There is loads of information on the FCA website and they are quite helpful if you give them a call.

Very interesting Tony, thank you. Looks like they seem to be able to get around FCA regulation by being an intermediary and leaving the regulation up to the financial advisors, really useful when speaking with the FCA (got a call booked in wiith them tomorrow) - to see the different types of products they can offer. Wonder why these guys don't go to the wholesale market to borrow if they have run out of cash - perhaps that's a downside of not being regulated? Anyway, thanks again.

 

[BenJacobs]

You didn't clarify much there.

What do you actually want to achieve?

Mortgage lending is a volume business, and most successful lenders use wholesale markets to scale up, earning low margins on an enormous book of loans.

You seem to be asking how to get regulatory approval to lend, then specifically not use wholesale markets, which would be an inefficient use of your capital.

A banking license enable you to operate as a bank. Most banking activity is not necessary if you just want to lend your own money against residential property, so no, you would not need a banking license.

What I'd like to achieve is for clients of my company (home buyers) to be able to take mortgages out with us directly - not as a broker / intermediary, but as a lender - so rather than sending them away to make an application through a high street bank, I want the facility to be able to offer the funding itself as a high street bank would. However, not interested at this point in time in acting like a bank (taking deposits), so not looking for the full banking licence.

I do want to access the wholesale markets, which is why I believe we will need some sort of FCA regulation first - though getting this information out of them is like pulling teeth. Do you know the process on how to achieve this - both becoming the lender, then accessing the wholesale market for financing?

 

[tony84]

Wonder why these guys don't go to the wholesale market to borrow if they have run out of cash - perhaps that's a downside of not being regulated? Anyway, thanks again.

They do, it just seems like it has taken longer or there was a mix up or something - https://www.ftadviser.com/mortgages/2019/01/08/fleet-mortgages-pulls-entire-product-range/

 

[BenJacobs]

They do, it just seems like it has taken longer or there was a mix up or something - https://www.ftadviser.com/mortgages/2019/01/08/fleet-mortgages-pulls-entire-product-range/

Just checked them out, and they do have FCA regulation as BTL lenders.

 

[BenJacobs]

For those following this thread - the PRA have come back to me today and confirmed categorically that no banking licence is required as a mortgage lender not taking deposits. Huge relief. The FCA have sent guidance that confirms we'll be carrying out regulated mortgage contracts (PERG 4.4.1), so will need to be regulated by the FCA, which is what I first thought. Awaiting their capital requirement guidance. If anybody has gone through this process before / knows about it, please reach out to me. Thanks.

 

[tony84]

As a lender you will likely need more, I have to have £5k available.
I think IFAs need £25k or 2.5% or turnover (dont hold me to that).
So I am guessing as a regulated mortgage lender, you will need a hefty sum.

I have just been sat with a new lender this morning. One thing you need to have in black and white is your criteria, affordability model and so on. If you are doing regulated mortgages, there is going to be a lot of work needed.

I am not sure how in depth it needs to be. Most lenders published criteria is anywhere from 1-15-20 pages. When I worked for a mortgage lender and I know others are similar, they have a book of criteria - 200 pages of information.

 

[Mark T Jones]

As a lender you will likely need more, I have to have £5k available.
I think IFAs need £25k or 2.5% or turnover (dont hold me to that).
So I am guessing as a regulated mortgage lender, you will need a hefty sum.

I have just been sat with a new lender this morning. One thing you need to have in black and white is your criteria, affordability model and so on. If you are doing regulated mortgages, there is going to be a lot of work needed.

I am not sure how in depth it needs to be. Most lenders published criteria is anywhere from 1-15-20 pages. When I worked for a mortgage lender and I know others are similar, they have a book of criteria - 200 pages of information.

I'm pretty sure they wil want some in-depth info on your recovery processes too

 

[BenJacobs]

As a lender you will likely need more, I have to have £5k available.
I think IFAs need £25k or 2.5% or turnover (dont hold me to that).
So I am guessing as a regulated mortgage lender, you will need a hefty sum.

I have just been sat with a new lender this morning. One thing you need to have in black and white is your criteria, affordability model and so on. If you are doing regulated mortgages, there is going to be a lot of work needed.

I am not sure how in depth it needs to be. Most lenders published criteria is anywhere from 1-15-20 pages. When I worked for a mortgage lender and I know others are similar, they have a book of criteria - 200 pages of information.

Definitely going to need a hefty sum, expecting that to come back pretty high - and rightly so too. Same again with the amount of work - not expecting it to be an overnight thing, keeping myself checked into reality! 200 pages of criteria?! Wow. Do you know where to find these guides for different lenders, so I can start having a read of them? How did the meeting with the new lender go - are they bringing new products to market? Do you know if they're lending their own funds, or from the wholesale market?

 

[BenJacobs]

Positive they will do as well Mark - not sure exactly what they want until the FCA give me the guidance they're looking for. I'll keep updating the thread though, and still welcome all guidance from UKBF contributors.

 

[tony84]

The lenders do not publish the big bibles of criteria publicly, only the more common criteria.
I did try to get a copy of one of the banks before I left but emails were monitored and I think someone would have picked up on me printing off 200 pages.

You can get the more basic bits of criteria from the intermediary criteria pages of the lenders websites.

The lender I met today are already a lender in the second charge market and this was a quirky first charge product that will only get a small amount of applications a year. I am not sure whose money they use. I am guessing there would be money coming from the wholsesale markets. I think people like Blackrock lend money out to some of the lenders like Pepper/Bluestone, but I think they are talking tens of millions. I know Aldermore once lent about £50m to Keystone but I do not think they do that anymore. All of this information is on websites like Mortgage Solutions/Mortgage Strategy.

 

[BenJacobs]

The lenders do not publish the big bibles of criteria publicly, only the more common criteria.
I did try to get a copy of one of the banks before I left but emails were monitored and I think someone would have picked up on me printing off 200 pages.

You can get the more basic bits of criteria from the intermediary criteria pages of the lenders websites.

The lender I met today are already a lender in the second charge market and this was a quirky first charge product that will only get a small amount of applications a year. I am not sure whose money they use. I am guessing there would be money coming from the wholsesale markets. I think people like Blackrock lend money out to some of the lenders like Pepper/Bluestone, but I think they are talking tens of millions. I know Aldermore once lent about £50m to Keystone but I do not think they do that anymore. All of this information is on websites like Mortgage Solutions/Mortgage Strategy.

Would have been gold to have got hold of that bible of criteria... where does a company even begin to put that criteria in a polished enough state that the FCA will regulate it... are there companies that work with people to get offerings like that ready?

FCA confirmed the capital resource requirements today...

The capital resources requirement for a firm carrying on any home financing which is connected to regulated mortgage contracts, or home financing and home finance administrationwhich is connected to regulated mortgage contracts (and no other regulated activity), is the higher of:

1. £100,000; and
2. the sum of:
   (a) the credit risk capital requirement calculated in accordance with MIPRU 4.2A; and

(b) 1% of

(i) its total assets plus total undrawn commitments and unreleased amounts under the home reversion plan;
less
(ii) intangible assets (see Note 1 in the table in MIPRU 4.4.4 R) plus loans,securitisation positions and fund positions subject to MIPRU 4.2A.4 R.

...now it just needs decoding!!

 

[Financial-Modeller]

Glad to hear that you are progressing @BenJacobs

Still unsure what you're trying to achieve?

You're heading into a quagmire of headaches, cost and aggravation, with probably limited opportunity to recoup it all. With GBP1m (for arithmetic simplicity) and average house prices giving an average mortgage size of GBP200k, your capital could be quickly deployed to five mortgage borrowers, with your income directly dependent on the future creditworthiness of five strangers.

If you're an estate agent, surely getting mortgage broker status (lighter regulation and cost) and receiving a commission for each loan is a better business model, with the lender worrying about the majority of regulatory matters.

If you want exposure to property, you could invest in BTL, or develop sites solely or by JV, or just buy shares in property companies for completely passive returns.

You seem to be choosing most of the risk with very little reward, competing with massive volume players who have the scale to do it better than you will.

 

[BenJacobs]

Glad to hear that you are progressing @BenJacobs

Still unsure what you're trying to achieve?

You're heading into a quagmire of headaches, cost and aggravation, with probably limited opportunity to recoup it all. With GBP1m (for arithmetic simplicity) and average house prices giving an average mortgage size of GBP200k, your capital could be quickly deployed to five mortgage borrowers, with your income directly dependent on the future creditworthiness of five strangers.

If you're an estate agent, surely getting mortgage broker status (lighter regulation and cost) and receiving a commission for each loan is a better business model, with the lender worrying about the majority of regulatory matters.

If you want exposure to property, you could invest in BTL, or develop sites solely or by JV, or just buy shares in property companies for completely passive returns.

You seem to be choosing most of the risk with very little reward, competing with massive volume players who have the scale to do it better than you will.

I've explained it all very clearly - can't say much more on what I'm going for.

I've done a lot of property business - privately owning very large estate agencies, a sizeable personal property portfolio, 14 years in industry, etc. and I've got to say - no business has been without its headaches, cost, aggravation, etc, as you say - but on the flip side, none have been without their amazing learning experiences, financial pay-offs, and excitement - so I'm okay with that. £1m? Then go to the wholesale markets and pull down many multiples of that for additional lending - the way many, many (all?) lenders do. Have done the broker model in a previous large agency, works okay, but would prefer to be on the lending side than the broker side. Scale does not mean doing a better job. Never seen a giant taken down by an underdog?

 

[Gordon - Commercial Finance]

Would you think about lending on a bridging and development basis? Shorter time to completion, less regulation, shorter terms?

 

[BenJacobs]

Definitely would Gordan - something I'm looking very closely at as well. Have loaned on bridging before, and it did work well. Loans have all been paid back and have good relationships with the borrowers. I'm not expecting to get fully regulated for mortgage contracts tomorrow, it's a long-term goal, but one I'm actively working on now. Like you say, lending on bridging/development basis makes good sense, with a lot less regulation. Not sure if you can access wholesale markets for this type of lending though, believe it's your funds / JV funds (with tight contracts) so quite limited with scale?

 

[tony84]

I suppose it depends what part of the market you gear yourself at.
You are never going to compete with the high street rates at the cheaper end of the market. Most newer entrants (pepper/bluestone/TML/Vida) have all gone towards the adverse market. If you look at the likes of Together, they have rates pushing 10%.

As a broker we tend to specialise in the adverse market and can honestly say the majority of those people we see realise their mistakes and 2 years later we get them either on to better adverse rates (if they started with the likes of Together) or on the high street if they started with the likes of Pepper. From my experience (maybe 50 mortgages a year) less than half a percent carry on getting defaults.

There are compliance companies out there but I think they are more for brokers. You could also maybe look at teaming up with maybe a small building society and setting up a pot of money to lend out? As an example, there was a building society (I can not think who) who would lend up to 75% LTV for customers who had been bankrupt over 3 years ago. You could maybe put a pot of money aside to allow them to go up to say 85%. That means on a £100k mortgage, your million pound pot is being split over many more cases as they are only dipping your pot for the difference. As they already have infrastructure in place (application systems, underwriters etc) it also cuts down your set up costs.

Personally I think if you have a million pound, you are going to lose a lot of that just getting insurance, underwriters, back office systems, offices, compliance, legal advice, contracts drawn up and so on. I can only speak personally and I spent a good few grand doing something that gets done by 10 people a week (maybe) with support being fairly readily available.

I am not sure how thorough your criteria needs to be. I get the impression most lenders set up with fairly basic criteria and once you have traded for 12 months and had a review by the FCA lenders then start to open up their criteria which is also based on feedback from customers/brokers.

 

[tony84]

And dont forget you will also need to pay the FCA every year.

 

[BenJacobs]

Incredible that rates pushing 10% are taken by consumers... they've phenomenally high... but I guess if it's the difference between home ownership and not, then those in adverse scenarios will be tempted. Certainly not the type of market we'll be aiming at though, just not something that I'd be comfortable with, neither something that I doubt would be good for securitisation down the road.

Really like the idea of teaming up with a small building society - great idea. Have had somebody reach out to me from a similar background, and we're discussing details and criteria, so could recommendation and heads up, thank you.

Totally agree with you regarding starting with a fairly basic criteria, and then continue to refine as we go. From this process, I've definitely learned that we'll be wanting to massively increase our loan book for consumer loans, and carry on growing that side of the business, whilst building our prospectus for mortgage lending as we continue.

Thanks again for your input, you've been a massive help!