The lender is also offering near prime residential mortgages up to 75% loan-to-value from 3.35% for a tracker and near prime buy-to-let rates from 3.90% up to 70% LTV.
Pepper chief executive Richard Klemmer said the lender is keen to offer deals to customers who have suffered a credit blip in the past linked to a specific life event.
He also revealed the lender was not interested in how large a credit blip borrowers had suffered and would place no cap on this. He added: "We are more interested in whether the borrower can demonstrate they have got their finances back on track. We are looking at the length of time they have been repaying debt for regularly since that life event."
Pepper is launching with a select panel of intermediaries initially including Brightstar Financial, Residential Home Loans, Connect Mortgage Club, Platinum Options and 3MC.
George Patellis, the former chief executive of defunct bridging lender Tiuta, is in talks with other intermediaries and plans to extend the broker panel this summer.
For the full story, read this month's profile feature.
PROFILE
Richard Klemmer is a man with mortgage pedigree. If you were to handpick someone to run a specialist lender in the UK, Klemmer would be very near the top of your list with Future Mortgages, Oakwood Global Finance and edeus just three ventures he can put his name to.
Most mortgage brokers worth their salt will well remember Klemmer setting up Future Mortgages 20 years ago with Brian Pitt now of Rockstead, Mark Abbott who founded Beacon Homeloans and Mike Culhane, founder of Oakwood Global Finance, now joint global group chief executive of Pepper and the man with the money behind the launch of edeus.
Klemmer and Culhane have done a merry dance between Pepper in Australia and Oakwood Global Finance in the UK since then. In 2001 Culhane ran Oakwood with Klemmer moving to Sydney to head up Pepper – a securitisation-funded lender specialising in residential mortgages, unsecured loans, auto-finance and leasing finance. In 2006 Oakwood acquired Pepper only to sell it on four years later to an Australian consortium led by majority shareholder Seamus Dawes at which point the UK-based Culhane emigrated to run the Pepper business from Australia.
Three years later in 2013, Pepper then acquired Oakwood with Culhane becoming joint group chief executive and Klemmer becoming UK chief executive in London.
The UK business already runs €11bn of residential mortgage and small balance commercial loans in Ireland as third party servicer for various banks and private equity firms who bought discounted mortgage books following the financial crash in 2008. For £2bn of mortgages in the UK, the firm has also been appointed the lender of record, taking full regulatory responsibility for borrowers on the books.
Now it is the turn of Pepper Homeloans to join the lending fray – a launch which has been hotly anticipated for the past few years.
“Our group strategy is to penetrate markets globally and offer the full suite of what we do where we think the timing and location is right,” says Klemmer. “Pepper is a multi-national broad-based consumer finance outfit offering funding outside of the traditional sphere. We already service 75,000 mortgages in the UK and are convinced that now the time is absolutely right to commence lending ourselves.”
The management team at Pepper have spent the past 18 months researching the British market and working closely with intermediaries – namely Brightstar Financial, Residential Home Loans, Platinum Options and Connect Mortgages - to assess where to pitch their offering for UK borrowers.
The conclusion they came to was near prime and non-conforming mortgages to borrowers with past credit defaults or county court judgements against them who can tie those problems to a specific event and demonstrate they have rebuilt their finances and affordability.
“We will underwrite case by case with every case having a case owner,” says Klemmer, who adds that he believes the larger bank lenders’ reliance on automation of credit checking has left a rather large niche of the market poorly served.
“In many respects a whole generation of people have gone through life experiences that now make them non-conforming in the eyes of traditional banks. We saw the worst performance of loans in late 2009 and 2010 when there were rounds and rounds of redundancies, disruption in jobs and people finding it tough to get back to work. These were blips in their credit history.”
It is not a new market. Near prime first reappeared in 2011 when Precise Mortgages launched a range of deals specifically designed to cater for borrowers with adverse credit histories. Precise remains one of very few lenders in this space, joined nominally by GE Money, Magellan Homeloans, Kent Reliance, Kensington and a few building societies.
It is a sparse collection of names compared to the hey-day of sub-prime lending in the UK between 2005 and 2008. Klemmer estimates that specialist residential mortgage lending at its peak was around £30bn whereas now, based on the volume of securitisations going on, he reckons the market is somewhere between £2-5bn.
“It’s a fraction of where it was,” he says. “I don’t think we’ll ever get back to that – it was exaggerated by poor quality lending that shouldn’t ever have been done. But there is growth potential there.”
Rather than taking an “analogue” approach to assessing borrowers which sees them simply pass or fail lenders’ criteria, Pepper does not rely on credit scoring. Brokers are also given a “direct line” into a specific underwriter for every case so that extenuating circumstances are properly and sensibly considered.
This is particularly important not only because brokers are clamouring for access to decision-makers at lenders but also, critically, because Pepper has taken the decision not to set a hard cap on what adverse events it will consider. Unlike other lenders in the near prime market, Pepper won’t fail a borrower application if they have a £1,010 CCJ or default because their criteria has a hard stop at £1,000 of adverse credit.
“There is no direct correlation between the value of the judgement or default and the borrower’s likelihood of failing to repay again in future,” says Klemmer. “We are much more interested in the proximity of their last failure to pay and when they apply for the loan which we think is a much better indicator. If they’ve had a judgement or default in the past six months then we aren’t interested – it’s much more likely that they aren’t back on track with their finances after such a short time period. But if they can demonstrate that their defaults or CCJs were connected to a specific event such as redundancy and show that they’re now able to satisfy affordability, then we don’t put a cap on how big the default was.”
Klemmer is bullish on the future opportunities in store for Pepper. “I think we’ll be seen as much more forgiving and aggressive on some of the criteria we will accept than some of our peers. We are going to be less aggressive on the proximity to default. It speaks to what is going on in their lives at the time. Our job is to find people who have suffered adverse credit in the past, and those events are all being seen around the same time tagged to an event or series of events. And subsequent to those events they have had no problems and they can show it was an isolated event.”
Klemmer also reveals that as well as launching a non-conforming mortgage line and a near prime mortgage line up to 85% loan-to-value with rates starting around 3.35% for a tracker and 3.95% on a fixed term, Pepper will also look at buy-to-let borrowers with some adverse credit history up to 80% LTV.
Next year the European Mortgage Credit Directive will bring in stricter rules for buy-to-let where the landlord is deemed to be “accidental”. As a direct result of this, many in the buy-to-let market are predicting that regulated buy-to-let will become a much more competitive area of the market, spurred on by an influx of new landlords using their freed-up pension savings to purchase income yielding property as an investment. Depending on how they do this, for example by downsizing themselves and renting their former home, many are likely to fall into this bracket.
“We absolutely see this as an opportunity for us,” says Klemmer. “We’re not looking to compete with the Paragons of this world for professional landlords, we are looking much more at the smaller scale end of the spectrum.”
Klemmer adds that, if all goes according to plan, Pepper is likely to launch a range of secured, unsecured and auto loans within the next three years. It may also look at small balance commercial loans, which it has some experience of in Ireland, and leasing finance.
“We are aiming to be in the top quartile of specialist lenders in the UK,” says Klemmer. “I don’t want to put a number on that but we want to be one of the top two to three lenders in this market pretty quickly.”
The lender has put its eggs into the broker basket, launching a small pilot in Q1 this year with Brightstar but Klemmer says over the summer months Pepper will announce a range of mortgage networks and distributors it is in conversations with about joining its panel. George Patellis, the former chief executive of bridging firm Tiuta, operations director at Lehman Brothers’ Preferred Mortgages (another sub-prime lender) has come on board as Pepper’s head of sales and marketing and plans to lead the march on broker relations.
“We think it’s important to our view on intermediary lending that we open up direct lines of communication with the decision-makers on a case by case basis,” explains Klemmer. “Brokers we spoke to during our research phase said they’ve found it increasingly frustrating not being able to talk to the people who make decisions on their clients’ applications, so that’s what we want to avoid. It’s not revolutionary but it doesn’t seem to be something that other lenders are doing very well right now.”
Growth is firmly on Klemmer’s horizons with Pepper’s 240-strong UK team set to grow to 300 by the end of the third quarter, prompting a move from its South Kensington offices to a larger base in Uxbridge. His team on the mortgage origination desk, currently 20, is also set to grow.
With 1,200 staff globally and presence as a lender, servicer and securitisation specialist in Australia, Hong Kong, South Korea, Spain and the UK, it seems that Pepper is both capable and determined in its ambition to spice up the specialist sector with an offering that brokers and borrowers will be glad to have back in the market.
