A wave of new lenders could enter the UK mortgage market thanks to falling securitisation costs and better-than-expected European regulations that would have decimated the market in their original form.
Solvency II is a fundamental review of the capital regime of European insurers and the reforms it proposes, which aim to strengthen capital requirements and risk management standards across the sector; member states have to comply by 2016.
In its original form, Solvency II proposed a 16 per cent capital charge across all ratings bands.
The latest proposals would introduce a capital charge of 4.2 per cent for AA, 7.4 per cent for A and 8.5 per cent for BBB-rated securitisations.
Mortgage consultancy Home Funding chief executive Tony Ward says: “Securitisation has been disadvantaged compared with other funding streams like covered
bonds and corporate bonds, so I think these proposals are probably aimed at addressing some of those inequities.
“If the costs associated with running a securitisation are being brought down, or at least not increasing by as much as originally proposed, then the market does look a more attractive proposition for new entrants as well as investors.
“The securitisation market grew quickly from around the early 2000s and became an important funding tool right up until 2007 when the market simply died a death,” says Ward.
“It is coming back, however, and it needs to come back. It takes away a lot of risks for lenders that retail depositors just don’t take away.
“Mortgages are a long-term risk and funding them with short-term deposits leaves lenders facing a significant liquidity mismatch. Any signs that we are returning to a properly managed, responsible securitisation market is a positive.”
Homeloan Management Limited director of securitisation services Steve Rogers says a continuing downward trend in securitisation costs will likely attract new lenders to the market.
He says: “I envisage several new lenders will come into the mortgage market over the next 12 months and one of the major driving forces is lower securitisation costs.
“Following the economic crash, securitisation got a lot of bad press. However, if carried out correctly, it can be a vital tool to help boost the economy by increasing the supply of credit.”
However, others say the associated costs of launching a new lender and other barriers would stem any flow of new entrants.
Precise Mortgages managing director Alan Cleary says: “Clearly, if the securitisation market is functioning properly, that is a good thing for the whole of the market.
“If the proposals to limit the increase to the costs of securitising are passed, that is positive but it doesn’t necessarily lead to a rush of new lenders.
“You cannot just securitise if you haven’t got a track record and there are significant costs associated with securitisations as well so there are barriers for new lenders.
“The securitisation market getting bigger is encouraging but it doesn’t necessarily mean we’ll see a lot new lenders.
“What you might see is more lenders using securitisation as a funding tool as there are plenty of lenders who could use this funding stream but don’t.”
West Bromwich Building Society head of structured finance David Barton says: “You would never argue against reducing the cost of securitising but in terms of whether or not the market will see a rush of new lenders; that depends on a few variables.
“You would have to look at what the alternative sources of funding were for lenders, because it’s all relative.
“Some lenders may feel they can raise funds cheaper through the retail deposit route, it is really a case-by-case thing.”
However, Barton says barriers to entry in the mortgage market are “not insurmountable”.
“We’ve seen new lenders coming to market over the past 18 months and we’ve seen from the FCA and the Bank of England that there are applications in the pipeline as well,” he says.
“A resurging securitisation market will of course have an effect on the number of potential new lenders, but I don’t think we’d see a rush of lenders joining the market as a result.”
Trade body the Association of Financial Markets in Europe director for core capital markets Sidika Ulker says the proposed reduction in securitisation costs will not go far enough to attract new lenders.
Ulker says: “The main point is that the discussion around capital charges falls away if the yield is strong enough to make the investment worthwhile. However, the return on capital through securitised mortgage pools does not incentivise investment.
“What would need to happen is a widening of the spread so that yields from these investments make it worthwhile for the insurance companies to purchase the mortgage pools.
“Until that does happen, I don’t see the proposed changes leading to a jump in new lenders.”