Securitisation can be a very positive thing for the mortgage market.
Steve Rogers, director of securitisation services at HML, sets out why an upturn in the securitisation market can be good news for brokers as well as lenders
It’s fair to say that the securitisation market has been quiet in recent years and that any green shoots of recovery have been short-lived, but the case for increased securitisation is quite overwhelming as the method can be greatly beneficial to lenders, brokers and ultimately borrowers.
While the sale of mortgages into asset-backed securities deals got something of a bad reputation in the years following the financial crisis, when deals are clear, transparent and comparable, they can breathe new life into the market as they can provide lenders with increased liquidity.
This fact was recently highlighted in a study carried out at Nottingham Trent University. After analysing data over an eight year period, professors at the university’s Real Estate Economics and Investment Research Group stated that securitisation could reduce a lender’s costs and give them the ability to lend further.
How does securitisation work?
In simple terms, securitisation works by packaging up a portfolio of mortgages in order to fund them long-term in the bond markets.
If a lender has access to £1bn of funding from saving deposits and short-term funding, all they can lend is up to that amount of money. However, if they securitise, they can lend that £1bn, refinance it and effectively lend that money again.
It provides liquidity to the market and the long-term profit for the lender comes out of the streams of cash that come out of the securitisation, while the bond investors receive a percentage of the interest payable on the mortgages.
Increasing competition in the market
For smaller lenders, such as the challenger banks, securitisation gives them more flexibility in the way they lend. If they know they have securitisation as a funding solution, it can allow them to be more competitive in terms of pricing.
At the moment, the public securitisation market for mortgages is not even 25% of what it was before the financial crisis, but as it recovers we should start to see the interest rates that bond investors demand begin to fall, and that will allow lenders to price their products more competitively, which is good for borrowers and, of course, brokers.
Everyone is expecting the market to come back at some stage, with central banks particularly vocal at industry conferences about their support for, and benefits of, securitisation. While securitisation as a funding tool has been criticised as a result of the financial crisis, mainly due to issues in deals overseas, the UK securitisation market has held up well, particularly due to the robust UK housing market.
We have been helping clients to securitise for more than 20 years. In that time HML’s ability, through our bespoke iConnect platform, to enable lenders to clearly segregate their assets and produce the MI required to support deals and hold data of the quality needed for the analysis of their portfolios has been key to their, and our, success. HML and its subsidiaries are now also able to offer additional services, such as holding legal title to the mortgages, providing regulatory compliant advice, and IFRS9 modelling capabilities.
In conclusion, securitisation can be a very positive thing for the mortgage market. While brokers may not be overly exposed to it (some may not even know it happens), I feel that those at the front end of the mortgage lifecycle should know all they can about how it works and the way it can improve liquidity and product availability.
