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Paragon predicts rally in BTL and plans return to lending

Heron: ‘Return of confidence’
Heron: ‘Return of confidence’

Paragon Mortgages director of mortgages John Heron says the buy-to-let sector could be lending at “normal” levels within three years.Heron says new business could hit £20bn-plus within three years but that this is only possible if the liquidity is available to fund BTL mortgages.

He says: “You still have a very constrained mortgage sector and BTL is no different. Eight to 10 billion pounds a year is a low level of lending for our market, a normal level would be more like £20bn-£25bn and I think we could be back at that within three years, subject to better liquidity being available.”

There has been much speculation about Paragon’s return to new lending since its withdrawal from the market in February 2008, when it failed to secure commercially acceptable terms to extend the loan facility used to fund lending.

Stockbroker Arden Partners told investors in April that Paragon could be “weeks away” from new lending. Heron says the business is keen to get back into the market but has no specific date in mind, saying only that the market has so far frustrated its ambitions.

He says: “It’s great there is that kind of anticipation and enthusiasm from people we do business with but it’s frustrating for us as we want to be in a position where there is continuity.”

He adds that Paragon will return to new lending when it is able to gain access to funding that is in line with its business philosophy of matching long-term borrowing for long-term lending.

He says: “A reason why Paragon has been successful through the financial crisis is that the principle within the business has always been to use match funding. We never expose the business by borrowing short and lending long. Some of the businesses that got into difficulty did so because of the mismatch.

“We will be confident about getting back into the market when those sorts of funding lines are reliably available. You need sufficient confidence in the bond markets and the other element is the banking market – specifically the warehousing process – which provides the short-term finance needed to fund a flow of mortgages until you get to the minimal value needed to create a longer-term mortgage-backed security.”

Last month, Heron, speaking as Paragon announced an 83 per cent increase in profits for the six months ending March 31, said the company was continuing to “prepare the new business for new lending”, and that it was in discussions with a number of parties to discuss financing new lending.

Heron believes that confidence is returning to the bond markets and that it will not be long before lenders are able to secure wholesale funding, on which Paragon is reliant, to fund mortgages.

He says: “We have certainly never made any secret of our intention to continue lending as and when it is appropriate.

“Confidence is clearly returning to the bond markets and some confidence is returning to the banking markets but it is skittish. We are still seeing considerable nervousness around sovereign debt issues in the European banking markets and concern over national debts.

“We have no doubt those mechanisms are recovering and there will be opportunities to build secured funding models in the reasonably near future.”

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