ART Homes

1
ART Homes

• Kick Start Presentation

2
Presentation

• Background
• Policy context
• History
• How the Service Works
• Private Finance (Funder Contract)
• PQQ Requirements
• HBoS Loan Offer
• How the Fund Model works
• Sensitivity Scenario Tables (25 year outcomes)

3
Private Sector Renewal Policy Background

• Grants to Homeowners since 1969 (age based)
• Envelope Group Repair schemes to support Area
  Based Regeneration
• Mid 80s 1.2bn p.a. (lt400k in 2008)
• 1989 Means tested mandatory grants (means test
  based on income to service commercial loans)
• Demand/need exceeded resources mandatory
  element removed in 1996 responsibility shifted
  to LA discretion.
• 2002 regulatory reform order to give LAs power
  and flexibility to develop subsidised loan
  schemes.
• AIM TO STRETCH SUBSIDY

4
AHL History

• Mainstream lenders not interested in lending
  direct
• LA loans not core business/expertise cant
  secure private finance outside PSBR
• SPV required to provide focus attract private
  finance
• ART Homes (Oct 2000) subsidiary of Aston
  Reinvestment Trust
• 2000 2003 research, product development and
  pilot loans
• PAL developed following research project funded
  by HC
• Sept 2003 first 1m fund from BCC to pilot PALs
• Dec 2003 ART Homes acquired by Mercian
• First PAL loans 2004

5
ART Homes Ltd

• Not-For-Profit Special Purpose Vehicle
• Purpose
• To provide affordable finance to enable low
  income homeowners achieve decent homes through
  improvement and repair or relocation
• For people who cant access normal commercial
  finance
• To enables LAs to use subsidy more effectively
  than grants
• To develop products tailored to suit LA strategy
  and delivered in partnership with LAs

6
AHL Lending to Date

• West Midlands Merseyside South Wales
  Edinburgh
• Completions 17.6m (1,140 loans)
• Offers 10.8m (530)
• Live enqs 3.3m (230)
• TOTAL 31.7m (1900)

7
ART Homes Ltd Loan Book
8
How The Service Works
9
Current Application Funding process
Kick Start
Fund Manager FSA Regulated Lender
loan
Customer
AHL
FSA Regulated Mortgage Advice
application
LA
IFA
High St Lender
10
Proposed Application Funding process
Bank
Kick Start
Funder
Fund Manager FSA Regulated Lender
loan
Customer
application
Financial Advice Service FSA Regulated
LA
IFA
High St Lender
11
Application Funding process (Future Dev)
Other investors/ lenders
Bank
Kick Start
Other regions
Funder
Fund Manager FSA Regulated Lender
loan
Customer
application
FSA Regulated IFA
LA
High St Lender
12
FUNDER CONTRACT

• Private Finance Model

13
Private Finance

• KS PQQ requirements
• No future financial commitments required from LA
• 7030 public/private finance (43 leverage)
• First Second Charge Loans
• No compulsion on customer to take additional
  products
• No additional interest charge to customer above
  HPI
• Funder/bank shares risk
• Potential for fund growth/sustainability
• No Excessive profit for bank
• HBoS Requirements
• Will not tender direct but will provide loan to
  AHL
• Return commensurate with risk (New untested
  scheme)
• Repayment/exit option _at_ 25 years
• Will not give individual loans to customers
• SPV lender must be FSA regulated
• Security over fund

14
Private Finance

• Customer Protection
• No repossession guarantee
• No ongoing payments required
• Avoid risk of negative equity
• Repayment on sale/death/by choice
• AHL/Mercian Requirements
• No risk to or from other Mercian Socially
  Rented assets or other AHL loan funds
• Ethical no risk to reputation

15
Private Finance Offer

• 50m Public Fund levers 22m from Bank (drawn
  down over 5 yrs)
• LA has no financial risk in excess of initial
  50m
• Potential for LAs 50m to grow
• Bank gets capped max return of 3 month Libor 2
• Bank risks losing money if fund performs badly
• Fund performance depends on
• Interest rates
• House price inflation
• Redemption rate
• Depending on fund performance either
• Bank loan paid back within 25 years LAs fund
  in profit
• LA can refinance and pay off any o/s bank loan
• LA can walk away and leave fund with bank
• Existing PAL product unchanged for Customer
• Fund is ring fenced so no risk to or from other
  Mercian Assets or AHL Loan Funds

16
FUNDER CONTRACT

• 70 KS (50m) 30 Bank (22m loan to AHL)
• Profiled drawdown over first 5 years (as delivery
  plan)
• Redemptions
• 40 to Bank (used to repay rolled up interest and
  capital)
• 58 to KS (Model assumes withdrawn from fund)
• 2 to AHL (to contribute to fund management
  post offer redemption admin after yr 5)
• Covenants
• Fund revalued every year
• If o/s bank loan with rolled up interest exceeds
  35m then 100 redemptions for that year paid
  to bank until covenant restored
• If o/s bank loan exceeds 50 of fund value (after
  yr15) then 100 redemptions for that year paid
  to bank until covenant restored
• If total LTV of portfolio exceeds 65 then 100
  redemptions for that year paid to bank until
  covenant restored
• Fees
• Banks arrangement fee 1 (220k) - paid over
  5 yrs
• Interest rate on capital drawn Libor 2
  (7.8)
• Banks Commitment fee (non-utilisation fee)
  0.75 on any funds not drawn down in line with 5
  year profile (For first 5 years only).

17
Planning Profile
18
Fund Movements Accounts
HBoS Bank
Bank loan
AHL Funder
Kick Start
70
30
customer
PAL loan
1
AHL Fund Mgr FSA Regulated Lender
19
Fund Movements Accounts
HBoS Bank
Bank loan
AHL Funder
Kick Start
70
30
customer
40
PAL loan
1
redemption
2
AHL Fund Mgr FSA Regulated Lender
60
3
20
Fund Movements Accounts
HBoS Bank
Bank loan
AHL Funder
Kick Start
70
30
customer
40
PAL loan
1
redemption
58
2
AHL Fund Mgr FSA Regulated Lender
60
3
2
21
Fund Movements Accounts
HBoS Bank
Bank loan
AHL Funder
Kick Start
70
30
customer
40
PAL loan
to restore covenant
1
redemption
2
AHL Fund Mgr FSA Regulated Lender
60
3
22
Fund Movements Accounts
HBoS Bank
Bank loan
AHL Funder
Kick Start
70
30
customer
40
PAL loan
Up to 100 to restore covenant
1
redemption
58
2
AHL Fund Mgr FSA Regulated Lender
60
3
2
23
Fund Movements Accounts
HBoS Bank
Bank loan
AHL Funder
Kick Start
70
Public Only Fund
30
customer
40
customer
98
PAL loan
Up to 100 to restore covenant
loan
redemption
1
redemption
4
5
58
2
2
AHL Fund Mgr FSA Regulated Lender
60
3
2
24
Financial Model Funder Contract

• Banks base case assumptions
• KS 50m 72m loans
• House Price Increases average 3.4 (10 fall
  in yr1, then 1yr _at_ 0, then 4pa)
• Interest rates average 7.8 (Libor 2)
• Redemption rate
• 0 for 3yrs
• 2.5 p.a. for next 5yrs
• 3 p.a. for next 5yrs,
• 4 p.a. for next 5yrs then
• 5 p.a. . (82.5 repaid in 25 yrs)
• Redemptions repaid to KS in yrs 4-25 44.4m
• Fund Value after 25 yrs 27.5m (KS 16.1m
  Bank 11.4m)
• Bank loan repaid by year 27

25
Comparison Summary
26
Financial Model Funder Contract

• Interest rate change (lower)
• KS 50m 72m loans
• House Price Increases average 3.4
• Interest rates average 6.75 (historic avg)
  (7.8)
• Redemption rate
• 0 for 3yrs
• 2.5 p.a. for next 5yrs
• 3 p.a. for next 5yrs,
• 4p.a. for next 5yrs then
• 5 p.a. . (82.5 repaid in 25 yrs)
• Redemptions repaid to KS in yrs 4-25 50.4m
  (44.4m)
• Fund Value after 25 yrs 27.5m (27.5) (KS
  13.4m (16.1) Bank 14.1m)
• Bank loan repaid by year 26 (27)

27
Comparison Summary
28
Financial Model Funder Contract

• Changed redemption rate (faster)
• KS 50m 72m loans
• House Price Increases average 3.4
• Interest rates average 7.8
• Redemption rate
• 0 for 3yrs (0)
• 5 p.a. for next 5yrs (2.5)
• 5 p.a. for next 5yrs (3)
• 5 p.a. for next 5yrs then (4)
• 5 p.a. . (100 repaid in 25 yrs (82.5)
• Redemptions repaid to KS in yrs 4-23 60.2m
  (44.4)
• Fund Value after 25 yrs 0 (all repaid by yr 23
  ) (16.1)
• Bank loan repaid by year 21 (27)

29
Comparison Summary
30
Financial Model Funder Contract

• Changed redemption rate (slower)
• KS 50m 72m loans
• House Price Increases average 3.4
• Interest rates average 7.8
• Redemption rate
• 0 for 3yrs (0)
• 2.5 p.a. for next 5yrs (2.5)
• 2.5 p.a. for next 5yrs (3)
• 2.5 p.a. for next 5yrs then (4)
• 2.5 p.a. . (55 repaid in 25 yrs) (82.5)
• Redemptions repaid to KS in yrs 4-25 18.9m
  (44.4)
• Fund Value after 25 yrs 79m (27.5) (KS 43.8m
  (16.1) Bank 35.2m)
• Bank loan not repaid by year 30 (27)

31
Comparison Summary
32
Financial Model Funder Contract

• HPI Changes (Higher)
• KS 50m 72m loans
• House Price Increases average 7 (historic
  avg) 3.4
• Interest rates average 7.8
• Redemption rate
• 0 for 3yrs
• 2.5 p.a. for next 5yrs
• 3 p.a. for next 5yrs,
• 4p.a. for next 5yrs then
• 5 p.a. . (82.5 repaid in 25 yrs)
• Redemptions repaid to KS in yrs 4-25 96m
  (44.4m)
• Value of fund after 25 yrs 60.5m (27.5) (all
  KS 60.5m (16.1) )
• Bank loan repaid by year 25 (27)

33
Comparison Summary
34
Financial Model Funder Contract

• Based on historic rates
• KS 50m 72m loans
• House Price Increases average 7
• Interest rates average 6.75
• Redemption rate 0 for 3yrs then 5 p.a. for
  next 20 yrs (100)
• Redemptions repaid to KS in yrs 4-23 105.3m
  (44.4)
• Value of fund after 25 yrs 0 (all repaid yr
  23) (16.1)
• Bank loan repaid by year 18 (27)

35
Comparison Summary
36
Base Case
44m repaid
37
Historic Case Model
105m repaid
38
Sensitivity Summary

• Interest rates Low impact on overall return
  small variation to how quickly money repaid
• Redemption rates low impact on totals (amount
  repaid value of fund _at_yr 25) but high impact
  on how quickly money repaid (balance between
  repaid equity in fund _at_ yr 25)
• HPI very high impact on performance of fund
  returns

39
Scenario comparisons
40
Scenario comparisons
41
Questions
42
END
43
Fund Manager Service

• Key Elements
• Underwriting
• Loan offer set up
• Procures and administers
• Legals
• Valuations
• Customer service/relationship banking
• Post completion/after sales
• Dealing with lenders
• Arrears Recovery
• Redemptions
• Compliance Standards
• Management of Fund accounts
• Mgt Info client liaison

• AHL Offer
• AHL is FSA authorised and regulated lender (first
  charge)
• CCA licence (second charge loans)
• Managed Loans Funds (5yrs successful delivery
  experience)
• Specialist with vulnerable client group
• Experienced in partnership working with LAs
• Meets FSA Treating Customers Fairly standards
• Excellent record of customer satisfaction
• Procures discounted valuation and conveyance fees
  
• Social business but not public sector - so can
  access wholesale private finance
• Meets due diligence requirements of HBoS
• Sits alongside HomeBuy Agency to help integrate
  with funding models for affordable homeownership

44
Financial Advice Service

• Key Elements
• Interview Fact Find
• Financial Assessment
• Financial Advice Recommendation
• Referral Recommendation to FM or other lender.
• Training for Delivery Agencies LAs

• AHL Offer
• AHL - FSA authorised and regulated advisor
• Provides independent whole market advice
• Provides training to LA Agency staff
• Meets FSA Treating Customers Fairly standards
• Excellent record of customer satisfaction
• Advisors recruited with emphasis on understanding
  and empathy with client group.
• Advisors not paid commission
• CeMAP CeRER qualified advisors supported to
  achieve advanced CeMAP

45
Quality Assurance Framework
Governance
Processes Procedures Culture
46
Proposed Structure - (based on 1100 referrals pa
to FA - 880 to FM)
Policy/Strategy Business Dev Marketing
AHL Fund Management
AHL Financial Advice
HomeBuy Agency
47
Challenges

• Financial/Loan Services must tie in with Delivery
  Programmes
• Accurate Profiling and Programming important
• LA policies and programmes must deliver referral
  numbers
• Need for flexibility and ability to respond to
  change
• Coordination and Partnership working
• Grant culture
• Staff training and sign up
• Delivery agencies quality of work
• Managing expectations interface between public
  private sector

48
Summary

• Greater need than ever to find funding solutions
  for low income homeowners in poor housing
• Kick Start at Forefront of developing model and
  demonstrating delivery
• AHL social business working in partnership with
  LAs has confidence of mainstream commercial
  lender.
• Already demonstrated ability to innovate and
  deliver scale with high levels of customer
  satisfaction and manage growth
• Model can be replicated nationally
• Potential to achieve economies of scale and
  competition for private finance in medium term
• Opportunity to mainstream service and make
  significant impact for low income homeowners and
  provide effective support to area regeneration.
• Opportunity to integrate affordable and
  sustainable homeownership policies and strategies

49
Typical PAL Case

• Homeowner with House valued at 100,000
• Existing Mortgage 30,000
• Needs 15,000 of improvements/repairs
• Low level of savings
• Income level will not support increased mortgage
• No commercial equity release products available
• Meets LA criteria for support (historically
  considered for improvement grant)

50
15 PAL
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15 PAL
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15 PAL
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15 PAL