Written evidence submitted by the Paragon
Group of Companies
INTRODUCTION
1. The Paragon Group of Companies welcomes the
opportunity to submit evidence to the Treasury Select Committee's
current inquiry into competition and choice in the banking sector.
2. We are the UK's leading specialist provider
of residential mortgages to professional and investor landlords.
We launched our first specifically targeted private rented sector
mortgages in 1995 and have increasingly specialised in this market
over the last 15 years.
3. The company has been publicly-listed for the
last 25 years and is currently the UK's third largest lender of
privately rented residential property finance. We have approximately
40,000 landlord customers and manage £10 billion of loan
assets. Our buy-to-let arrears, at 0.97%, currently stand at less
than half of those typically achieved in the owner-occupier market.
4. As a non-deposit taking lender, Paragon has
extensive experience in the securitisation markets. We were the
first to undertake a securitisation in the UK almost 25 years
ago and we have successfully completed more transactions than
any other market participant, all of which have been straightforward,
transparent and low-risk.
EXECUTIVE SUMMARY
5. The key points of our submission are as follows:
— Non-deposit
taking lenders utilising securitisation were the mainstay of many
of the more specialised parts of the UK mortgage market prior
to the credit crunch, providing vital competition to the major
banks and an important source of choice for consumers.
— Securitisation
played a vital role in the UK mortgage market more generally,
accounting for 80% of the net funding needs of the mortgage industry
in the 12 months before the credit crunch.
— Fundamental
problems in the US housing market—not the securitisation
model itself—contaminated the global wholesale funding process
and caused the liquidity issues that still persist today.
— Non-deposit
taking institutions, such as Paragon, that draw primarily on securitisations
to fund new lending have been impacted negatively by the impairment
of credit markets. Despite remaining profitable, our ability to
make new advances has been severely constrained.
— Government
and Bank of England support packages have to date been skewed
in favour of the mainstream banking sector. Non-deposit takers
have been excluded, placing them at a significant competitive
disadvantage.
— Competition
in some lending markets has been eradicated by the lack of wholesale
funding availability, with many of the major banks not engaging
in sectors traditionally served by non-deposit takers.
— In
the case of the buy-to-let market this has serious social consequences—a
shortage of funding for private rented homes is emerging at a
time when people are increasingly unwilling or unable to enter
the owner-occupier market and the social housing sector is already
at full capacity.
— Ensuring
that credit flows are sustained and that competition in lending
markets is increased will be crucial to the recovery of the British
economy and, within the housing sector, to a stable and growing
private rented sector. Reinvigorating securitisation markets lies
at the heart of this.
— We
welcome the Government's focus on reviving securitisation and
would urge HM Treasury and BIS to look at ways of improving non-banks'
access to warehouse funding—a key element of securitisation
that remains highly challenging and is limiting the recovery of
wholesale-based lending
THE IMPORTANCE
OF SECURITISATION
TO COMPETITION
6. The main business model utilised by non-deposit
taking lenders involves the aggregation of mortgages into a warehouse
facility, with funding provided by banks until public securitisation
allows debt to be raised through the issuance of bonds. Lenders
whose business is based on this model rely on securitisation for
long term funding and have been the mainstay of many of the more
specialised parts of the UK mortgage market. Securitisation has
therefore played a vital role in the UK mortgage market. In the
twelve months prior to the credit crunch, 80% of the net funding
needs of the UK mortgage industry were provided by the capital
markets through securitisation.
7. As a result, the non-deposit taking sector,
funded in the main by the securitisation markets, provided a vital
source of competition for mainstream banks in the mortgage market
in advance of the credit crunch. This helped to drive product
innovation and a diversity of finance for consumers in a stable
way, and without any of the risk associated with many mainstream
banking practices in recent years. It has been more fundamental
problems in the US housing market that have contaminated the global
wholesale funding process and resulted in the liquidity issues
that still persist today.
8. The example of Paragon demonstrates how securitisation
has been—and can in the future be—used responsibly.
We pioneered the use of Asset-Backed Securities in the UK and
have securitised £19.5 billion of first mortgages and consumer
loans through 53 public transactions. All continue to perform
well and we have no exposure to any toxic assets, having neither
originated nor acquired such assets.
THE CONTINUING
IMPACT OF
THE CREDIT
CRUNCH
9. The impact of the credit crunch was particularly
severe on the availability of funding from the capital markets
for non-deposit taking institutions and as a result, such lenders
have been unable to compete in the mortgage market since 2007.
As a result, we are unable to secure the necessary warehouse funds
on economic terms to originate new mortgages to private landlords.
The wider non-deposit taking sector is in a similar position.
10. There have been some signs in recent months
that the market for Residential Mortgage Backed Securities (RMBS)
is improving. Investor appetite has increased across the credit
spectrum and recent deals have attracted a large number and greater
range of investors. However, the market remains fragile and requires
nurturing and support.
THE CURRENT
STATE OF
COMPETITION
11. Competition in some lending markets has been
eradicated by the lack of wholesale funding availability, with
many of the major banks not engaging in sectors traditionally
served by non-deposit takers. Bank of England figures show that
specialist mortgage lenders accounted for just 3.7% of new mortgage
lending in 2009 compared to 21% in 2007. Specialist lenders provide
an important source of competition for mainstream lenders, ensuring
product innovation and consumer choice.
12. The buy-to-let market is an example of a
specialist lending sector that has been adversely impacted by
the closure of the wholesale funding markets. The availability
of buy-to-let mortgage products for landlords has declined by
over 90% since 2007 due to the forced withdrawal of non-deposit
taking lenders the focus of high street lenders on their mainstream
residential mortgage businesses. The buy-to-let market is now
dominated by just two lenders, Lloyds and Nationwide, which together
account for approximately 80% of the UK's buy-to-let business
and face little competition in this important part of the market.
13. The decimation of product availability in
this particular market is not due to a lack of demand from investors
or concerns about the credit quality of the product. Buy-to-let
lending, when underwritten appropriately, is high-performing and
reliable and arrears in the buy-to-let market have outperformed
the wider market for 34 of the past 38 quarters. Paragon's arrears
levels remain significantly below those of the wider mortgage
industry and industry peers. We are also experiencing robust demand
for new loans from our customers, but we are unable to satisfy
this demand due to funding constraints.
14. Due to the dysfunction in capital markets,
non-deposit taking institutions such as Paragon, which were core
providers of finance for investment in the private rented sector
before the credit crunch, have been unable to extend loans to
new landlord customers. This has potentially very serious social
consequences that should not be overlooked, such as increased
levels of homelessness.
15. Demand for private rented sector accommodation
has expanded significantly in recent years due to a combination
of short-term economic factors and longer-term structural changes,
such as a growing population, increasing numbers of single person
households, expanding numbers of students and economic migrants
and the general housing shortage. Proposed changes to the financial
regulator environment are also likely to reduce the availability
of residential mortgages as the Financial Services Authority clamps
down on interest-only and self-certified loans. There is increasing
evidence of a shortage of properties and there will be upwards
pressure on rents without new investment by private landlords.
The Royal Institution of Chartered Surveyors reported in August
that the proportion of surveyors reporting rent increases rather
than falls was growing.
16. Market domination by two lenders—as
is the case in the buy-to-let market at present—is both
non-competitive and of detriment to private landlords and private
tenants at a time of rising tenant demand. There continues to
be little competition and choice for borrowers in this market.
BARRIERS TO
ENTRY PERSIST
17. Ensuring that credit flows reach consumers
and businesses continues to be key to the recovery of the British
economy. The securitisation market lies at the heart of this and
its continued fragility is being felt on the wider market in the
form of poor competition and choice for consumers.
18. Both the coalition government and the previous
administration have recognised the importance of securitisation
markets to the future of mortgage finance. The previous administration's
Guarantee Scheme for Mortgage-Backed Securities provided some
lending support, but excluded non-deposit takers, skewing the
market in favour of mainstream banks and placing non-deposit taking
lenders such as Paragon at a competitive disadvantage. Furthermore,
the expiry of this facility has exacerbated the funding gap that
currently exists in the market, which will get considerably larger
as the Treasury and Bank of England's liquidity support schemes
also expire over the next two years. The Council of Mortgage Lenders
estimates that there will be a £300 billion mortgage funding
shortfall over the next five years due to lenders having to repay
Government support schemes.
19. We are encouraged by the acknowledgement
of HM Treasury and the Department of Business, Innovation and
Skills that securitisation is important as a funding source for
banks and non-bank lenders alike in their recent joint consultation
on "Financing a private sector recovery". Reinvigoration
of the securitisation market is essential to future recovery as
retail deposits alone were insufficient to support lending before
the credit crunch and will not be sufficient to support sustained
mortgage availability moving forward.
20. In particular we would urge the Government
to explore ways of improving non-banks' access to warehouse funding—vital
to the revival of the securitisation market—on more acceptable
terms. We will be submitting our views to Government on this issue
as part of its consultation.
CONCLUSION
21. It is important that Government supports
the financial community to address dysfunction in the wholesale
funding markets, especially as both securitisation markets and
the wider economy remain fragile. We urge HM Treasury to form
a securitisation forum to facilitate a full and frank discussion
with RMBS market participants about the measures needed to restore
a sensible, prudent and transparent securitisation market, needed
to increase competition and ensure a stable flow of mortgage finance.
22. Paragon is separately working on public-private
solutions that would help generate meaningful competition and
choice across all sections of the mortgage market.
September 2010
| 
