Stephen Hogg - Chief Operating Officer
Interview with Intermediary - October 2023
Q: First, can you introduce yourself?
A: I started out in the mortgage industry in 2004 slightly by accident, I joined a firm called Oakwood Global Finance and they created a business called Oakwood Homeloans. That was mortgages through and through, particularly non-bank specialist mortgages. So, I cut my teeth on working with management teams and businesses buying portfolios, securitising, all of that good stuff.
I went through the Credit Crunch in that business, and built the servicing business that's now Pepper Advantage UK. I then went into a credit fund to get a bit of European experience and get out of the mortgage market for a bit. When I came back to the UK I worked for Metro Bank for about six years, initially to build out its mortgage business, particularly the technology platform.
I brought a couple of billion pounds worth of mortgages onto the balance sheet and was the commercial director there for a bit. After that, I was looking to get back into the smaller, nimbler, more entrepreneurial businesses that I was used to.
I wanted to get into a more entrepreneurial place, and frankly, be able to deploy some of the lessons that I've learned through my career about how to build value in those kinds of businesses. I was instantly impressed with CEO Danny Waters, his way of thinking about things, and he was looking for someone to take West One to its next stage of growth.
I’ve been here for almost five years now, and it has lived up to the billing –I've been able to do the job that he wanted and I've got out of it what I wanted to.
Q: What is it that makes West One stand out in the market now?
A: There's a number of things that are bound up together under the label of ‘financial heavyweight’ in my head. West one is quite old – its roots go all the way back to 2008 – and it's been consistently really profitable over a period of many years. For a non-bank it’s very large, very stable, with really deep, really broad funding relationships, and it's got a globally significant equity investor.
Of all the non-bank specialist lenders, those you would rank for stability, reliability, size and balance sheet dependability, which have also been around for a long time and demonstrated growth and profitability over many years, it's a very short list. West One doesn't really have all that many peers. So, if brokers are looking for experience, reliability in choppy markets, and a lender that's going to do what it says and be there to lend the money it says it’s going to lend, West One is absolutely front and centre.
Beyond that, there’s people and products. All businesses say they’re customer-led, of course they do, and we’re no different but we also focus on our own people. We recruit and train some of the best and most creative people in our market, and we promote them through our business. So, the people running our bridging business and our development finance business came in as underwriters, and are now running multi-million pound businesses.
That works really well with our customers, bringing energy, creativity and inventive solutions to bear to solve their problems. As for products, it's more than just selling boring mortgages for us; it's about making our entire product suite work for the customer’s lifecycle. We love it when customers use our money to make money. So if they want to buy a piece of land with a bridging loan to get some planning, and then they need some development finance to build some units, and then maybe they need to bridge the development exit while they're selling some of the units – these are all products. They're all ways that people can borrow money from us, and what we're really focused on is doing it all under one roof, and making it frictionless.
Nobody wakes up in the morning and says ‘I really want to buy a mortgage’ – what they want is funding so they can do something else. We are in the business of providing our customers with effective solutions in the form of lending products.
Q: How have customer profiles – and challenges – changed over recent years?
A: Our core customer base is growing, so on the one hand we’ve got those we’ve been dealing with for 10 years, who keep coming back to borrow repeatedly – that’s great because it's easy to lend to people where there's a relationship and an established track record on both sides.
One of the things we've found is that as we've got bigger, is that we can do more. So, the genesis of our development finance business was people who kept leaving our bridging loans to get development finance with other lenders but saying they would stay if we offered those products – it was a completely customer-led market entry.
At first, we might have been nervous writing a £1m loan, but fast-forward, and our balance sheet is £2bn and we’ll happily write a £20m development loan.
So, as our overall balance sheet grows, so has our ability to house larger customers – and to grow with our customers and meet their changing borrowing requirements over time.
One change is that there are new parts of the market we are moving into a bit more, for example with the launch of our first charge residential mortgages about a year ago. That’s going to be an even bigger focus over the next 12 months or so as we grow that out a bit more.
Q: How has the first year of first charges been, navigating particularly choppy waters?
A: If we’re being entirely honest, we would have liked to have done a bit more than we have, but often when the market is difficult, it’s as easy to lend too much money as it is to lend not enough, and it's actually much more dangerous to lend too much. We trimmed our credit appetite quite early, when things were starting to get a little rough, bringing our loan-to-values (LTVs) down – we’re still about 5% below our old maximum LTVs.
Obviously with the rate volatility bouncing around all over the place, it's been very difficult to price consistently. One of the things we've noticed this year across all of our propositions is that the market has been turbulent, so we've had some record months – a couple of our best lending months ever in the history of the business – but then rates will jag in a different direction, all the pricing goes up, and the pipeline falls again.
So, it's been fits and starts rather than a consistent year of month-on-month growth. However, the underlying core of our business remains incredibly resilient and very strong. If I look at the entirety of West One I'm absolutely delighted with how well we've gone through this, with profit generated in every month – we haven't written loans that have lost money in any of our lending lines, and I feel like now what we have is quite a lot of pent up supply. We are ready to go when the market opens up a bit, and we have bags of market opportunity to come.
We don't want to sell money too cheaply and we don't want to sell money that won't come back in the door again, and that means deliberately trimming our appetite. First charge resi – as the newest kid on the block, the least established – has probably suffered the most through our own prudence, but that just means more opportunity next year.
Q: How does the firm approach decision-making when it comes to lending appetite and rates?
A: This is a super hot topic in the industry at the moment. We have never pulled an offer once it's been issued, and we never intend to – that’s pretty much sacrosanct, even with the volatility we’ve had. We have a pricing committee and we look at swap rates every day, we have an excellent CFO with a very intelligent hedging strategy, that was in place long before the volatility hit.
So actually, we haven't seen anything like the profit destruction that some of our peers have, because we were quite well-hedged. We've worked very hard on that, and we spent more time on it this year, to make sure we are always in the market. We never want to be pulling products and letting brokers down, because that is just bad news for everybody. It's bad for the customer, bad for the broker, and bad for us. If we ditch those pipelines, we have to rebuild them again, having lost goodwill along the way.
Sometimes the customer service principle bumps into the principle of never writing a loan at a loss – the challenge throughout this year has been balancing those two things. Every single lender has had the same experience. From our perspective, we've traded through Brexit, the invasion of Ukraine, Covid-19 – we’ve been in the market all the way through.
Sometimes we lift prices, and put them back down again as soon as we reasonably can. We're not chasing super profits. We're chasing a reasonable return on our risk and just working very hard to be efficient at transmitting our prices into the market, as well as being predictable and clear.
Any lender has to give bad news to brokers sometimes. If they can do it quickly, clearly, with a rationale and with some alternative options, that’s a hell of a lot better than just saying ‘no, you can’t have that product’.
We’ve been working very hard to deliver all pricing news – good or bad – to the market efficiently.
Q: Do you think there’s work to be done to improve the market’s reactions during difficult times?
A: Very much so. It's not just localised in the high street either, we've definitely seen lenders in the specialist space which have belatedly realised they've got pricing exposure and made handbrake turns. Particularly in smaller lenders where they have smaller balance sheets, and are less resilient, less well capitalised. If something's a problem, it's a problem at quite a small number, and therefore they have to take quite volatile action to protect themselves.
The high streets are slightly different, in that it’s more of ‘computer says no’, scorecard-driven approach, where a treasurer somewhere in an office far away makes a decision based on the model output, and suddenly he's cut a swathe through hundreds of pipeline cases.
All this actually works out in West One’s favour. Our business model is meant to be resilient, it’s meant to be stable. It's meant to offer the very best of what specialist lending can be, at scale and in a dependable way. In a market where there's lots of volatility, if we can be a north star, that’s a good place for us to be.
Q: As a firm with experience across many sectors, what would you say to brokers looking to diversify?
A: It's very interesting looking across the different markets – they do behave quite differently. Bridging is peculiarly resilient. Whatever's going on, bridging works. People borrow for different reasons, so when the market’s red hot, people borrow to turbocharge their speculation, such as to buy a property and flip it. Then, one of the things we learned during Covid-19 was that bridging is also really good for solving other problems if customers need to raise liquidity against a property asset quickly – for example to support their business.
Development finances is also interesting for a slightly different reason. It's a bit more cyclical, but structurally, we simply haven't got enough houses in this country. That is going to carry on being true for decades.
Developers with good sites, building good assets that people want to buy, at prices that the market can bear – they're going to be there forever. The ones on the margin, where the projects are a bit thin or they are less experienced, they do come and go with the market rising and falling.
In buy-to-let (BTL), some are talking about the death of the market, but it’s much exaggerated. I keep reading articles telling me there are 20 to 25 renters in a queue for every rentable property. That doesn’t sound like a market that’s dying anytime soon.
What we will see is consolidation within BTL – smaller landlords selling to bigger landlords. The rental sector is still quite strong, but you need scale and you need to run it as a corporate exercise for it to make sense, and at the more complex end, such as houses in multiple occupation (HMO) – that feels like the way the market is going.
Looking at second charges: in a world where the cost-of-living is going up, unsecured debt burden is going up. If people have property and they need to consolidate expensive unsecured debts, then providing they get the right advice, and providing the affordability is there, it's a really useful product.
Brokers have a great part to play there if they can do that well. It’s slightly more complicated than it is for first charge but it is a good product and brokers can add real value to customers with good advice.
It's about having many strings to your bow, and many different avenues to earn income. It’s easy to say, and it's hard to be a broker across all of these things, but the defence against volatility is distributed effort across all products.
Q: Does West One plan to change or grow its proposition in the near future?
A: Grow yes, not major change no. We'll look at additional product lines, and the closer they are in adjacency to what we do already, the more attractive they are. So, for example, I could see us one-day doing semi-commercial mortgages.
Our strong equity base also means that we tend to look at M&A opportunities as they arise. We must have looked at 10 of those this year, but none of them were quite right for the core of what we’re doing, and it’s not a strategic priority to grow through acquisition.
Instead, our future is about doing what we do, better and bigger. It’s sticking to our knitting, not being distracted and simply focusing on growing quality and profitability.
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