While these are of course important, to me the less visible part of mortgage innovation are where real gains are to be made – these include mortgage sourcing, approaches to underwriting, mortgage servicing and most importantly, mortgage funding models.

Funding has come a long way since the early days of homeownership, when building societies collected deposits from members and lent money so people could build homes. We have seen the evolution from use of balance sheets to securitisation models and now marketplace funding.

Mortgages-as-a-Service

At Landbay we employ a marketplace funding model that we term ‘Mortgages-as-a-Service’ (MaaS). This involves partnering with many institutional investors who provide the capital to fund our mortgages and in turn use the expertise and experience of our credit and wider team, to originate, underwrite and service prime UK buy-to-let mortgages to provide them with the resultant returns.

Accessing mortgage investment

A financial institution who wishes to access mortgages has three options: compete, buy or partner. The first two are the more traditional methods:

• Compete by setting up a lending operation: hire the people, develop or purchase the technology, build a brand in the market and then service and manage the loans. This takes significant investment and time.
• Buy a mortgage book: mortgage book sales are relatively few and far between and require a significant amount of due diligence in respect of origination and performance – and are usually a one off transaction. To continue to grow you need to go out and find another book etc.
• Partner with a lender: institutions can put in place a forward flow agreement committing to funding specific mortgage products.

The partnership method, or mortgages-as-a-service, gives the institution beneficial ownership of the mortgages originated for them without the significant cost of entry or building their own capabilities.

It is a mindset shift for the organisation involved from building with their own capabilities, but the return on investment is clear – and it doesn’t stop with banks and building societies creating mortgage exposures in this way. Insurance and pension funds, who normally purchase securities (which are heavily intermediated), can see far superior risk weighted returns in this sort of structure.

Through our mortgages-as-a-service model, banks and institutional investors who want to deploy funds into mortgages, can implement forward flow agreements working with us to shape the product set and returns they require.

This enables them to plug into Landbay and utilise our technology, recognised brand and whole of market coverage with the major broker networks and clubs, at a fraction of the cost of doing it themselves. It’s a simple and economical solution for institutional capital looking to invest in mortgages.

Mortgages-as-a-service enables institutional investors to determine the risk and return parameters they wish to invest in. Products are then allocated to the funders aligned to that criteria to the level they require.

This works for the investors as they are receiving direct access to the loans and can shape their risk requirements. It also works for the borrowers as a wide pool of investors on the lender’s platform results in a broader product range. A good example here is providing buy-to-let mortgages to limited company borrowers who are also trading companies – this niche is something that some funders may not have the appetite for but others do.

In essence, brokers and borrowers working with a mortgages-as-a-service provider don’t have access to one lender, they have access to the capital and risk appetite of many banks and funds.

Investing in buy-to-let lending

Buy-to-let mortgages originations have seen compound annual growth rate of 6% since 2014 with outstanding loans currently at around £300bn.

Most of the growth in the overall market is stemming from the professional buy-to-let segment – these are borrowers set up as special purpose vehicles, portfolio landlords or those focused on houses in multiple occupation (HMO) and multi-unit freehold blocks (MUFB). This is the area we focus on.

Buy-to-let is a great asset class for our institutional funding partners and sees higher returns and stronger performance to owner occupied mortgage lending. It is a countercyclical investment as demand for rental properties increases during difficult times.

The challenge facing those wanting exposure in the market is on building market share and generating volume, which requires major investment. That is why the partnership mortgages-as-a-service model make sense for our partners, our borrowers and ourselves.

Julian Cork is chief operating officer at Landbay