Paragon reveals new virtues

Before the credit crunch, Paragon operated a consumer lending business and offered buy-to-let mortgages. Both of these virtually stopped when access to affordable wholesale funding all but dried up (Paragon has no retail deposits to tap). In response, its bosses started to source alternative revenues and these are providing much of the current momentum.

Now Paragon derives an increasing chunk of its profits from buying and running off portfolios of unsecured loans from high street banks anxious to shrink their activities. Sure, unsecured loans come with risks, but Paragon pays far less than face value for them. Since 2009 it has bought approaching £100m-worth of loans, and they are performing well.

Paragon also put to good use its expertise in managing loans by establishing Moorgate Loan Servicing to manage loans for other lenders. This, too, has worked out well. By the end of last year it was servicing nearly 50,000 third-party accounts. And a further 33,000 are planned for inclusion by September this year.

However, most revenue still comes from providing buy-to-let mortgages, and there are signs of improvement in that market. Not only has Paragon established a warehouse loan facility from which it can draw funds to lend out, but in November it also completed its first securitisation since the credit crunch, raising £164m at 2.75 percentage points over Libor. What this entails is bundling a package of mortgages and using them as collateral to back securities, whose coupon is lower than the interest rate on the mortgages. Consequently, the mortgages disappear from the balance sheet and the money from the securities reloads the warehouse facility. And plans are well advanced to extend and increase this from the latest £200m facility secured with Macquarie Bank. All told, Paragon now has issued over £8bn of asset-backed securities.

And Paragon has always been a prudent lender. For the most part, it only deals with full-time landlords - typically with a dozen or more properties, and loan-to-value ratios are relatively modest at around 80 per cent of each property. Consequently, bad debts remain far below the industry average at just 0.54 per cent of the loan book. And, even where landlords encounter problems, Paragon adopts a hands-on approach by stepping in to secure the rental income required to meet the mortgage payments. If the landlord is unable to continue then a receiver is appointed, and last year there were 1,483 repossessions, of which 93.9 per cent were let out, with rental income more than meeting mortgage payments.

Of course, all of this could grind to a halt if financial markets suffer another seizure, which is possible given the state of the eurozone, thus freezing up wholesale money markets again. And at some point, although later rather than sooner, mortgage rates will have to rise from current lows, which could put pressure on some landlords.