Third party administration/outsourcing

Scarborough means business

November 2006

Scarborough Building Society is setting out its stall and challenging the might of HML and Vertex in the third-party mortgage administration sector. The society's servicing subsidiary, Scarborough Mortgage Services (SMS), and its asset trading arm, North Yorkshire Mortgages (NYM), were both set up in 1990 and are going through unprecedented growth and development. This has been helped by Scarborough's investment in new systems, new processes, new people and new capability.

SMS has a dozen or so clients ranging from small building societies to large investment banks. It's the latter that SMS is particularly interested in.

A growing number of large, foreign investment banks are entering the UK mortgage market and they're all after a slice of the lucrative specialist lending cake.

George Haslem, head of operations at Scarborough, says: “The investment banks are driving the growth and success of SMS and NYM.”

Scarborough currently has two investment bank clients and is in advanced talks with a third. It operates a partnership strategy with them. Its first bank client was WestLB subsidiary Basinghall Finance, launched in September 2005. It has used the services of NYM to buy mortgage assets of some £660 million, and SMS has been servicing those loans. Basinghall has been able to build up a sizeable mortgage portfolio consisting of a range of mortgages from prime to sub-prime, through to buy-to-let and self-certification. It is now ready to start originating its own mortgages with SMS servicing the loans, and is due to launch soon as a lender in its own right.

Lehman Brothers, a subsidiary of US-owned SPML, is the latest client of SMS and recently bought a £180 million mortgage portfolio. “We will be able to announce another major client by the end of this year,” adds Haslem.

Longer-established clients include Derbyshire Home Loans, Mortgages plc and a number of local and regional building societies.

Proactive

Scarborough is the 18th-largest building society, with total assets under management of £3 billion. So why are global investment banks going to a regional building society for help to get them into the UK mortgage market?

“We are being more proactive,” explains Haslem. “Organisations are coming to us to find out what we are about. We can put new assets on to a mortgage book within six weeks to three months. We understand the profile of a portfolio and can configure it to meet the needs of a client. We can also acquire portfolios on behalf of a client from the likes of GMAC-RFC and then we service it.

“We agree the service criteria with our clients - we listen to what clients want and respond rapidly. For example, we are able to do 24-hour further advances. If a Scarborough Building Society borrower wants to borrow more money, in over 50 per cent of cases they will have the funds the same day. We have that capability but none of our clients want it yet. When they do, we will be ready to go.”

Chief executive John Carrier adds: “We wanted to create an alternative to HML, which is a great business. We have been working on being more flexible and approachable with the ability to grow. We want to deal with a relatively small number of large clients and are talking to a significant number of large players. We believe the mortgage marketplace will open up for SMS.”

As well as trading mortgage books and serving loans, for the past two to three years the society has been securitising assets, including some of the mortgage assets of Scarborough Building Society.

Up until now SMS has not had an official service rating from a rating agency but this is to change. Fitch Ratings has assessed SMS and the result is imminent. The rating is based on ability to administer residential mortgage loans effectively and takes into account commitment to ongoing business development, process improvement, arrears management and general reporting. A rating will put the seal of approval on SMS's service capability.

AVMs

Scarborough Building Society started using Automated Valuation Models (AVMs) in August, primarily for remortgage cases with low loan-to-value – 60 per cent or less.

If an AVM is used, the cost to the borrower will go down from £285 to £150. The use of AVMs will be reviewed after six months and the LTV may rise to 65 or 70 per cent on remortgage cases as the society gets more experienced with this new technology. The use of AVMs could also be rolled out for house purchase mortgages.

In addition, if AVMs are working effectively, Scarborough will consider instant mortgage offers. Some time in the first half of 2007 it hopes to join the likes of GMAC-RFC and edeus with point-of-sale offers.

Tony Burdin, head of group marketing, predicts: “Once lenders become confident with the technology and accuracy we could be seeing 80 per cent LTV as the norm.”

Initially, the society's new sub-prime lending subsidiary Scarborough Specialist Mortgages (SSM) will not use AVMs, but this will be reviewed after six months.

Lending strategy

Scarborough undertook a major review of its lending strategy in November 2005. The outcome highlighted a number of new areas the society wanted to be involved in and over the next couple of years new products will be developed.

Carrier says: “We recognised that there is a growing debt culture in the UK, so we will lend across the whole market.”

Burdin outlined some of the areas the society wants to improve on: “We see first-time buyers as a significant set of people that we must help so are developing a product using parental help. Our self-build/renovation product will be revamped to be more flexible and help people with cashflow, which can be a big problem for self-build borrowers.”

Looking further ahead the society is also contemplating equity release, but not for at least two years. “It's a generation thing,” explains Burdin. “Research has shown that the generation approaching retirement age has a different attitude to the majority of today's older people, and they will be more willing to release equity from their homes rather than leave property to their children.”

The review also led to the inevitable non-conforming sector, but Burdin says the society has good reason to move into this market: “It isn't a reaction to jump into the sub-prime market just because everyone else is. We believe it is a natural fit as we have experience of sub-prime with our SMS and NYM clients.”

Sub-prime subsidiary

Scarborough Specialist Mortgages (SSM) was launched on 9 October, initially to select packagers and key business partners and will eventually offer business-to-consumer solutions. It took six months for the processes and systems to be bedded in before launch.

A full spectrum of products are being offered from near prime through to heavy adverse, including buy-to-let and adverse buy-to-let.

Scarborough Building Society already offers buy-to-let products and entered the holiday-let and student-let mortgage market at the end of 2005. “We are getting decent volumes and gaining a good reputation in this area of lending,” says Burdin.

“Our research showed that there is a high complexity of products in the sub-prime sector, so we decided to keep it simple. We are only offering two-year fixes and trackers, all with flexible features. The only loading will be on self-cert - except buy-to-let self-cert, which we are not doing.

“Most sub-prime business is for two-year products, as clients try to repair their credit sooner rather than later, but we would consider longer-term products if the demand was there. We might also do some exclusives.”

Distribution

Packagers play an important part in distribution, introducing around two-thirds of sub-prime business to the industry. Scarborough had never dealt with packagers before so researched the market by going out and having discussions with many of them.

SSM has opted for exclusive distribution with two packaging associations initially, the Alliance of Mortgage Packagers & Distributors (AMPD) and Freehold, which have access to 30 individual packaging firms.

Also important to Scarborough is its existing key relationships with distributors. So it will also be offering its product range through John Charcol, London & Country, Legal & General Mortgage Club, Mortgage Intelligence, Personal Touch and Premier Portfolio.

Internet portal

An internet portal has been set up for intermediaries to use - where they can produce Key Facts Illustrations (KFIs), receive a decision in principle and keep track of cases. The portal has also been built so it can be multi-branded and adapted to cater for any lender's products.

Underwriters

The new business process teams have multi-skilled underwriters. “Sub-prime underwriting is very different from prime underwriting and requires a different mindset,” says Burdin. “We wanted to buy in the right skills, so when Kensington Mortgages closed its Northern office we took on three of its former sub-prime underwriters. They have been able to train up five of own prime underwriters who are now skilled in all aspects of mortgage underwriting.”

A dedicated processing centre has been set up in Leeds, above the Scarborough's branch, where the three former Kensington underwriters are based. There is capacity for three further staff at the Leeds office, and at least one more underwriter is being recruited.

A business relationship team has been put together consisting of three regional development managers, one each to cover the North, South and Midlands. They will develop new business and look after ongoing business relationships.

Branding

Scarborough rebranded a couple of years ago. SSM is part of a family of brands where the same values are applied across the board. The name shows that the sub-prime arm is part of a building society which borrowers recognise. Burdin says that research has shown brokers have to spend time explaining to a borrower who a lender is if its name is not well known.

Carrier says that the SSM name is self-explanatory - Scarborough indicates the relationship with the mutual building society and Specialist Mortgages specifies the type of lending it offers. “We could have gone with the trend of naming yourself after fruit or even God,” remarks Carrier. “But we wanted to keep it simple and have the name reflect what it is we do.”

SSM and SMS

Specialist lender SSM fits in nicely with the third-party administration arm SMS, as mortgage assets it originates will be held on balance sheet, traded and securitised.

Brokers have access to both the building society for prime mortgages and SSM for the sub-prime range. In addition, SSM's products will be offered direct to consumers in the new year through Scarborough's nine branches. This will make Scarborough one of the first high street lenders to offer sub-prime loans in branches without being referred to another lender or subsidiary.

Reorganisation

Four years ago Scarborough Building Society moved into a purpose-built head office on the outskirts of the seaside town. Prior to this its main offices had been spread over three sites within Scarborough, but the headquarters heralded the dawn of a new era.

Chief executive John Carrier has been at the helm of Scarborough since 1992 and joined 20 years ago as general manager (operations) and secretary. He believes business moves in cycles and you need to know when to move the business on. “Being under one roof meant a new environment and greater efficiency,” he says. “And market pressures signalled it was time to develop the next phase of business.

“A strategic overview of the whole business was conducted, and we split it into four areas: strategy; operations; systems; and culture. These areas are interlinked and influence each other. We needed to restructure in order to work better and smarter, to deliver greater value for our members and to improve communications. The subsidiaries all had parts to play but needed to do more. We have achieved more through big changes in technology by migrating systems onto a new platform.”

In 2003 the society bought in new systems from Sandstone Technology, an Australian company, so its core mortgage system could be fully automated in time for the introduction of mortgage regulation on 31 October 2004. By M-Day the society had launched full capacity automatic application capture, complete with KFIs.

It has also developed a front-end portal for seamless processing which was developed for both Scarborough Building Society and clients of SMS. The portal was initially launched for Basinghall but it can be rolled out and adapted for any new lender.

Haslem calls it “lenderisation” - adapting the process to any client. “We build it once then make it adaptable to anyone,” he says.

End-to-end processing

The complete end-to-end processing - for both direct customers and clients of the subsidiaries - is carried out by around 80 staff divided into areas and subdivided into teams, such as post-completion, arrears, prime and specialist. Staff numbers have been growing somewhere in the region of 10 to 15 per cent this year alone with more growth anticipated.

Scarborough has a dedicated contact centre and teams in each business area are allocated to a client. The way the teams are set up means people can be moved around if necessary to cope with the peaks and troughs of business levels and client activity.

The society has developed its own internal Customer Relationship Management (CRM) system, which has been in place for around 18 months. All advisers can see a complete customer history, not just which products they have but it's also where any contact with customers is logged. To help with management information the system also measures the effectiveness of the teams.