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High price of loan deal

Mortgage commentators have welcomed the completion of HBOS’s 500m residential mortgage-backed securitisation recently but many are sceptical on whether it will have any impact on the market.

HBOS’s deal is the first public UK RMBS placed completely with investors since July 2007. The bonds are backed by a pool of more than 570,000 Halifax prime mortgages with an average loan to value of 61 per cent.

The deal, which contains bonds with an average life of 3.6 years, was secured at 85 basis points over inter-bank lending rates. An equivalent deal before the liquidity squeeze hit the market last August would have seen the premium over inter-bank rates at around 10 basis points.

HBOS says the deal was sparked by enquiries from a number of investors. A spokesman says: “We have created a placed deal to a small group of investors, 50 per cent banks and 50 per cent insurance companies, both UK and international institutions. It reflects the strength of HBOS and our quality as an issuer of RMBS. Given our position in UK RMBS, HBOS decided to take the first step to help open up the market. We have had a very positive response.”

Homefunding chief executive Tony Ward says the deal shows the market is not completely closed but he does not think there will be a lot more securitisations.

Ward says: “It was a very small deal for HBOS and massively over-collateralised. HBOS would not want to go on doing deals like that. I think it is fair play to HBOS that it has done it but it is not like a conventionally widely placed deal.

“I do not think it means we are going to see more securitisations taking place. We might see some privately placed deals. HBOS could not resist making the point that it is a very high quality issuer, which is true, but what it also means is that smaller issuers probably would not be able to get any deals. It does not help the normal issuers in the market.”

The Mortgage Practitioner sole trader Danny Lovey says: “It has probably opened the market but it is not a pricing that makes sense. Am I convinced there will be more securitisations? No. Was it realistic pricing? No. No wonder there were other banks and insurance companies interested. It is an exceedingly good deal for the investors.”

Lovey is concerned that the next securitisation deal will be priced at the same premium. He says: “You could argue that investors will want it for 85bps over Libor again. The HBOS deal will have set a precedent and other investors will not want to pay any more money for the bonds.”

Checkmate Mortgages executive chairman Stephen Knight points out that the first step towards recovery was always going to be a return of the RMBS market.

He says: “The HBOS issue was small and expensive but it was nonetheless a tentative first step that needs to be welcomed. When we get some volume back in that market, wholesale funding lines will be available once again and we can think about a thawing of the current liquidity freeze.”

GMAC managing director of sales and market Godfrey Blight says that any such deal is good for the market. He says: “It is the start but definitely not the answer. The asset was top quality but the return was average. It is great that HBOS did it but this will not get everyone securitising straight away.”

Blight points out that as investor confidence returns, pricing will get better on such deals. “In our view, that is going to take until some point in 2009,” he says.

The Association of Mortgage Intermediaries director Richard Farr says he would like to think the deal is a turning point for the UK market.

He says: “It is the end of the beginning. We are not out of the woods yet but we have to congratulate HBOS for showing some leadership. It is encouraging as investors have to started to look at the UK mortgage market.

“The price was expensive for HBOS but this is better than no deals at all. Obviously, we are not going to return to the same price levels as before last August but we will get to some parity once investors’ confidence returns.”

Farr is more hopeful than other commentators that HBOS’s deal will encourage other lenders to follow suit. He says: “I would love to think so. It is often the case of who blinks first. HBOS is definitely to be congratulated for making the bold move.”

Alexander Hall chief operating officer Andy Pratt says: “I think HBOS knows it is the market leader and that others may follow it. I am sure there was an element of it looking at the market and wanting to lend more. With over 20 per cent share of the market, it is important for it that the market reopens.”

Pratt dismisses speculation that HBOS will have to raise its rates as a result of the price of its deal. He says: “It would get into trouble if it was raising rates retrospectively for covering a hit from its securitisation deal.”


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