Article reproduced from this month’s Credit Today with permission.

It may not be the easiest time to set up a mortgage lending company, but Stephen Knight isn’t the sort of person to let that stop him.
Previously chairman of GMAC-RFC  and founder of Private Label, which grew to be the largest privately owned mortgage distributor in the UK under his stewardship, Knight is now setting up new lender Checkmate, and in 2009 he’s looking for funding.  “From the ashes of the credit crunch will come opportunity,” he predicts, sitting in his serviced office a stone’s throw from St James’ Park.
It’s going to be a slow game getting a new lender off the ground, but that’s not something that concerns Knight, who has built a team of around 31 people, 20 of whom came from GMAC.  “So far it has taken a year and we’ve put our management in place and raised our equity.”  As well as Knight himself, RIT Capital Partners and Lord Rothschild’s family interests have invested a total of around £15m to get Checkmate up and running.
However Knight underwent at least 55 knock backs from equity sources to get to this point.  Now he has to persuade someone to fund the mortgages themselves.  The aim is to launch sometime in 2009 and lend £500m in the first year, rising to £6bn by 2013.  “We expect to get turned down by funders for six months and then someone will say yes and off we’ll go,” says Knight.

Intermediary Loyalty
“I think there will be a tremendous advantage as the balance sheet lenders have taken over now - they’re the only ones able to lend but they’re not really geared up to deal with intermediaries.” Knight adds that Checkmate hopes to win “disproportionate support” from intermediaries by offering reasonably priced products and a “slick” service.
Ray Boulger, senior technical manager at mortgage broker Charcol, says the intermediary community will welcome the new lender though an important factor will be the price of funding as it will dictate the deals it can offer: “What the market is really crying out for is decent pricing for mortgages of 75 to 80 per cent LTV so I envisage Checkmate doing lower risk lending at the launch.”
He adds that the intermdiary community has a lot of confidence in Knight’s abilities.  “Stephen built up a very good reputation when he was at GMAC.  Net lending next year is likely to be close to zero so any additional funding has the potential to make an impact.”
Stroud and Swindon Building Society is also throwing mortgage brokers a lifeline with its new broker subsidiary In The Loop Mortgages, which will initially lend through a small number of brokers.

Knight is so convinced that he can make Checkmate work that he is inviting funders to hold back part of Checkmate’s earnings for a year - if a loan goes into arrears during that period, they won’t have to give the money back.  “One of our prime objectives is a better quality of mortgage asset.”  Other carrots for investors include the opportunity for the first four through the gate to take an equity stake.
Knight’s philosophy is that income multiples are not the best determinant of a customer’s ability and willingness to pay their mortgage back.  While at GMAC he instigated a predictive credit score to predict arrears, which was initially run in parallel to normal processes, then implemented as a replacement.  “There may be individual exceptions, but at the portfolio level the arrears performance will be better,” he says.  He also pioneered decision automation and instant credit decisioning.

Changing parameters
Despite his confidence about Checkmate, Knight says the credit crunch has changed the mortgage picture.  The company won’t be offering sub-prime or self-certified products and will telephone interview every client after an offer is issued.  Checkmate is also already investing in new technologies to try and minimise fraud risk.
In addition, the lender will apply a harsh debt to income ratio, taking the reversionary rate and adding one per cent when it calculates ability to pay.  Meanwhile, city advisers say they are talking to others interested in setting up mortgage lenders to replace those that have fallen victim to the crunch.  The test will be getting funding, but those that can will be well placed to take advantage of the inevitable need for mortgages - specialist and otherwise.

Lawrence Guthrie, managing director of corporate adviser Hawkpoint, says a few people are beginning to think there may be an opportunity to launch in the mortgage sector.  “So many people had to close their doors and the banks are dealing with their own major problems - plus they’ll be nervous,” he says.
While Knight says he doesn’t intend to become a specialist lender in the sub-prime or self-certification areas, Guthrie says others will look at ways to get into the sector.  In the long term, the supply and demand imbalance should even out, the question is just how long will it take.