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Advantage points

It is increasingly rare for there to be real innovation in our markets today, with replication the leading force. That is just one of the reasons to welcome Advantage’s new shared equity product – that is not what the firm calls it but that is what it does so that is what we will call it.

Word has it that the financing technology was sitting in Morgan Stanley for some time, that is, the techniques that will ultimately allow securitisation of the capital loan element. If that the case, it is a major put-down to a number of other US-based lenders which have publicly tried to deliver the product in the past but failed because they could not get the pricing right. This means either the rest are right, in which case the Advantage product will bubble and die in a short time, or they are wrong and Morgan Stanley really has found a new means to finance the product .

I think it is the latter, given the thought that has gone into it and this means that there is currently a furious round of reverse engineering going on in a number of investment banks to match it. You see, there is a view emerging that this form of shared equity lending could be the new non-conforming market. It enables lenders to achieve better margins on the pure lending element than traditional prime while retaining prime-style credit profiles.

Forgive me for saying this but the really important bit is that the market could be self-perpetuating in its growth. These loans , and there will be more of them, while designed to get more people onto the housing ladder, will fuel house price inflation. Their simple ability to stretch affordability will be leapt on by the market and will be used as much by buyers pushing further up market as by first-time buyers struggling to get onto the ladder.

After all, seven times multiples at relatively safe affordability figures is a dream for them both until, that is, they come to move. Because this enhanced buying power will simply furl inflation the next time they come to move, they will simply have to user a shared equity product again to move forward in the market. If they just buy their equity in, they will have to stand still and the aspirational do not like this .

In all this lies the real financing trick. I believe that Morgan Stanley has spotted that, once launched, the product will fuel its own returns – by accelerating HPI – and future volumes – by self-generated repeat business and this has persuaded them to take a punt into the unknown. Of course, if completion does arrive, it will put pressure on price and criteria but, just like the adverse market, it may take up to 10 years for the real margin advantage to be eroded away. As we can see today with the plethora of new entrants in that market, it is time for the next big thing.

Finally, the scary bit. What happens when the estate agents understand this? There are probably missives going out from head office in all the major chains, saying that now you can push the buyer harder by telling him how our mortgage advisers may be able to use this product to increase their buying power. I seem to remember some frightening stuff on BBC2 about collusion between mortgage advisers and negotiators. That could be nothing as to what could happen with this product around. Effectively, some negotiators will start acting as mortgage advisers – so what price their regulation?

Innovation is always a brilliant thing but perhaps even Advantage does not know the full impact of its new baby.

Mark Chilton is managing director of Purely Mortgages


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