This week we saw the announcement that Trigold and Crystal are to merge. Not a surprise in many ways, as both are among the market leaders for supplying mortgage technology solutions, but their respective technology solutions were focused on different functional niches – Crystal into mortgage point of sale solutions and Trigold in mortgage sourcing systems. By combining their solutions and expertise, they can become a mainstream technology supplier with considerable market muscle.

Importantly their respective business models and skill sets appear to complement each other – Crystal brings their technology platform and their ‘online’ enterprise solutions expertise, whilst Trigold provide great domain knowledge and a wide range of synergistic relationships with lenders and distributors, along with strongly recurring licenses from a client base that will help to shape and drive further profitability.

The overlap in functionality is small and because the two companies have partnered for years, their solutions are well integrated, so a sensible combined sale pitch is available from the start. The main failings would now appear to be outside of their core mortgage market as the combined company is yet to provide a fully competitive Financial Planning solution. They intend to address this later this year and their ability to deliver on that promise will be key if they are to secure their long-term goals.

One strange twist of fate is that Crystal’s offices are right next door to Mortgage Brain so Mortgage Brain and the new entity Trigold Crystal Ltd are now to be found on the same small business park at Bromsgrove in the Midlands.

It will be interesting to see what the knock-on effect within the industry is. Technology suppliers to the market have typically relied on detailed knowledge of Financial Services’ sales and compliance processes. As a result, the big IT companies like IBM and Oracle have often failed to penetrate the market, allowing lots of small specialist companies to serve this space. Someone recently told me that they evaluated 39 suppliers when looking for a sales system – in anyone’s definition that must be an oversupplied market.

From a selfish point of view, the oversupply creates opportunity for consultancy operations like AT8 to use their knowledge and selection methodologies to helps distributors choose the most appropriate solution for their needs from this wealth of suppliers. However, the number and size of these operations may not be sustainable or desirable and we believe further consolidation is inevitable and desirable.

Focus Solutions has long declared its intention to grow the business by acquisition, SSP are now owned by a Private Equity company that typically owns much larger organisations and will surely bankroll further acquisitions. Indeed, despite the current economic climate, rumours are rife in the industry as to who will buy whom.

The industry reshuffle will produce some substantial organisations but mergers don’t always produce the desired results. Technologies may not be compatible, personalities and cultures may clash, strategic stories may not align. Real danger lies in those mergers that happen because they have to happen to survive or to satisfy shareholders rather than the primary motive of creating a strategic competitive advantage. It will be fascinating to watch this space over the next 12 months and to see which companies rise out of the pack as the strategic winners.

Whilst I am not in favour of protectionism, it is interesting that the ‘emerging economies’ attending the G20 are seeking help to protect their economies with international funding. Whilst this is a great idea in principle, it needs to be equitable. As noted in the USA by Warren Buffet, there have been weaker companies that have been given Government guarantees that have made them stronger than organisations that were AAA rated through their own sensible management! At the moment, it is much better to be a ‘financial cripple’ with a ‘government guarantee’ than a ‘Gibraltar Rock’ without one…this cannot be fair either locally or internationally! Outsourcing has been largely motivated by cheap labour and one of the things that companies should do is to look at the legacy processes that they did outsource and see if they can be made more efficient in home territory or in the new territory – perhaps, but not necessarily, this can be helped by more effective and efficient use of technology.

‘The difference between genius and stupidity is that genius has its limits.’ – Albert Einstein

I was giving a presentation at an ILAG seminar and whilst talking to one of the attendees, I was struck by the fact that she was saying that there was some ‘good news’ about the current crisis! Her point was that it should bring an end to the stupid lending policies that resulted in 125% LTVs and income multiples that could never be sensibly justified. I agreed that this was a desirable objective, but that we should not forget that we had seen precisely the same ‘irresponsibility’ in the 1980s. Sadly, she then informed me, she was not old enough to remember those days! But, whilst it is true that Turner’s proposals should help to avoid such behaviour, the reality is that we will still face future risks once people’s memories have faded and ‘unjustifiable euphoria’ resurfaces with new ideas of how to lose money, or maybe even a few of the old ones too!

As I said in a previous blog, Turner has explained very well how the current crisis came to a head. In reading the report, it brought back memories of the five ‘C’s that used to form the basis of lending policy (for individuals and/or businesses) and which are as relevant today as they were in the ‘good old days’ of sensible [boring] lending. The reality is that some of our ‘highly skilled lenders’ deviated from the ‘basics’ of lending. Instead, trying to impress each other with their ‘sophisticated thinking’ that then got a lot of lenders in trouble. Regardless of the complexity of the credit, the basics still apply – ‘Cash Pays Debt’! It is worth remembering that statement and not confuse the cause of repossessions as being upon falling house prices – foreclosures happen because people are not able to meet the monthly repayment commitments.

So what are the five ‘C’s?
1. Character – how has the person (or business) viewed their previous credit obligations? Have they paid as agreed? If there have been issues, how have they responded – did they bury their head in the sand, or make proactive proposals. How do you feel about them? It had become unfashionable to expect a deposit, but there was a time (and we are seeing a return) when a deposit showed that the individuals could put money aside regularly and in so doing reduce the exposure of the credit.

2. Capacity (Primary source of repayment) – the ability of the individual (or business) to pay their debt – that is total debt, not just yours but any others they may have – according to the obligations of the loans, now and in the future? Look at net income after normal expenditure commitments… remember also that wealthy people can and do spend beyond their means! Shock tests should be applied to determine the ability to repay debt if rates were to increase. This used to be referred to as ‘lending 101’ where a test of what would happen if rates went up say by 1% increments.

3. Collateral (Secondary Source of Repayment) – this is usually the property against which the loan is secured and can be the ‘back door’ to recover debt if unforeseen problems occur. However, don’t be ‘utopian’ or ignore looking at the future for potential for economic downturns! We are not all as young as the lady I was talking to and many of us have seen property prices fall and the spectre of negative equity cannot be ruled out! Interestingly, although the value of the property [security] is assessed at the time of the loan, it is rarely reassessed unless it is linked to a further transaction. Given that one of my harbinger of doom statements is that ‘prices can plummet as well as fall’ lenders may want to consider obtaining a regular or time specific revaluation. Given the availability of electronic valuations, it is maybe surprising that this is not more widely used.

4. Capital – does the individual (or business) have the ability to sustain a downturn in the economy? Whilst it may be argued that any capital should be applied to minimise the loan, access to capital or savings could provide a buffer if income – primary source of repayment – is temporarily reduced.

5. Conditions – these can be various and include economic, employment, demographic, or political conditions. Considering the conditions prevalent at the time the credit is initiated is only part of the task to determine the viability of the credit risk. What are the terms of the credit and what could happen to the conditions during the duration of the credit? It is very difficult to foresee all potential problems, but it is unlikely that all the conditions will remain positive or consistent – as witnessed by the recent experience.

The five “C’s” of lending should never be thought of as ‘old fashioned’. They may not be as sophisticated as some clever algorithm, but, if properly applied along with practical judgment, they are ‘common sense’… the problem is that ‘common sense’ is NOT that common and being ‘too smart’ may not be smart at all!