‘Sub-prime’ lending has become a dirty term in financial services.
Mortgage loans made to individuals with tarred credit histories, which have been widely blamed for sparking the 2007/08 global financial crisis and the ensuing recession, are making a surprise comeback, but this time categorised under the ‘specialist’ banner – shedding their toxic sub-prime label.
Alistair Jeffery, founder and executive chairman of specialist lending firm Bluestone Group, said: “I was not a fan of the term [sub-prime] pre-crisis and I am less of a fan now.
“Specialist lending is the best description of what we do now because we focus on people who do not fit the criteria of conventional lenders.”
The Bluestone Group was founded in Australia in 2000 as a residential lender by Mr Jeffery, after he uprooted and moved down under to be closer to his parents who resided in neighbouring New Zealand.
Mr Jeffery had more reason to spend more time with his folks three years later when the business expanded there, and later diversified to include reverse and commercial mortgages to its suite of products.
The group was reliant on banks to finance the loans until it could accumulate a sufficient loan portfolio to operate a securitisation programme by issuing residential mortgage-backed securities in the debt capital markets.
The company was forced to change tack once the business model became obsolete during the credit crunch. It did so by becoming skewed to financing, acquisition and management of financial assets.
Mr Jeffery moved back to the UK in 2009 and Bluestone resumed its core lending model in 2013 via its acquisition of specialist mortgage lending and servicing platform Basinghall Finance, resulting in the transfer of £260m in legacy mortgage assets.
He said: “We found the process of changing to a specialist lending permission was polished and professional.
“Yes, there is more regulatory scrutiny on specialist lenders compared to conventional providers, and quite rightly so. We live in a different world to the one pre-crisis and a lot of lessons have been learned by both parties [lenders and the FCA].
“We had to prepare detailed business plans and projections, draft a detailed lending manual, design products and outline funding model. It took about nine months to become fully authorised.”
Bluestone underwriters do not run credit checks and turn a blind eye to County Court Judgements when considering loan applications, according to Mr Jeffery, adding that 60 per cent of its existing clientele have tarnished credit histories and 25 per cent consists of recent migrants – which he classifies as individuals who have come into the country in the past 12 months.
The group will also mull over applications from individuals who have been bankrupt in the past, but only if the order was discharged more than a year ago.
However, Bluestone will only accept customers who plunged into financial instability because of mitigating circumstances caused by accident, sickness, unemployment, divorce or redundancy.
“Divorce is a good example. During the separation process, both parties would be refusing to pay off a car loan, for example, and they end up damaging their credit as a result even once the situation is resolved.”
The additional burden to underwriting in tandem with the heightened risk of default and missed monthly repayments compared to the conventional lending process is factored into the firm’s products.
This translates to inflated rates, which are about 2 per cent or 3 per cent higher than conventional loans.
The group is owned by several private and institutional shareholders including Australia’s Macquarie Bank and, more notably, UK regional mid-market private equity house Lloyds Development Capital (LDC), which is owned by Lloyds Bank. The latter holds a majority 53 per cent stake in the business at the time of writing.
Lloyds Bank operates a fully fledged mortgage division but, unlike Bluestone, does not target consumers with adverse credit histories, which in theory leaves scope for synergy between the two organisations, with Lloyds referring borrowers who do not fulfil its lending criteria to the firm.
Conversely, Bluestone can point its existing clients in the bank’s direction, once their hampered financial history has been diluted by a strong record of mortgage repayments, to have access to more competitive loans.
Mr Jeffery said: “That is something we have done in Australia with one of the largest banks. It is something that we would be looking to consider in the future as LDC only invested in the group a year and a half ago.”
He added: “Rejecting an application outright does not put the bank [Lloyds] in a good light. Customers would rather hear: ‘No, but how about this,’ rather than ‘No’.”
Looking ahead, the group is considering entering into the interest-only mortgage market – with a view of providing two and three-year interest-only terms followed by a 27-year repayment period – and a specialist buy-to-let arena that caters for small landlords.
Myron Jobson is features writer at Financial Adviser
Alistair Jeffery career ladder
2000-present
Executive chairman, Bluestone Group
1995-1998
Director, Nomura International
1993-1995
Associate, Goldman Sachs
1989-1993
PhD, Engineering (Mining), Imperial College London
