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March of the non-conformists

Paul Thomas asks if a spate of mortgage-backed securitisations is just the jolt the market needs

The launch of Credit Suisse’s post-crisis securitisation backed by non-conform-ing mortgages has been seen as a sign that wholesale markets are reawakening but there is some distance to go before this translates into increased mortgage lending.

The wholesale markets dried up during the financial downturn and investors lost their appetite for bonds backed by mortgage assets. Mortgage lenders lost a vital source of funding, resulting in annual gross lending levels dropping from £364bn in 2007 to around £135bn today.

Finding a new source of lending is particularly important for those lenders who entered the special liquidity scheme, designed to provide liquidity to the banks by allowing them to swap high-quality mortgage assets for Treasury bills, as they must pay up by January 2012.

There has been a rising number of securitisations from UK lenders in the past 12 months backed by pools of prime mortgages – and the big banks have had few problems per-suading people to invest.

In September last year, the Royal Bank of Scotland launched a £4.7bn residential mortgage-backed security, followed in May this year by a well subscribed £3.75bn deal from Santander.

There have been signs since then that the wholesale market is coming alive again, with recent news that the Co-operative Bank will launch a £871m RMBS after its £2.5bn deal in February 2010.

Earlier this month, Money Marketing revealed Yorkshire Building Society had entered the securitisation markets for the first time with a £750m issue. Paragon Group is also looking to launch a deal by the end of the year.

However, so far, these deals have been almost exclusively made up of prime, owner-occupied mortgages, with the exception of a £200m offer from Kensington Mortgage’s parent company Investec, which contained a mixture of buy-to-let and prime mortgages.

Last month, Credit Suisse launched the first fully non-conforming residential mortgage-backed deal since the financial crisis. The deal is worth £482m in total, with two AAA-rated tranches worth £274m being publicly placed. It is being offered to investors at onemonth Libor plus 250 basis points.

The underlying pool of mortgages was originated by several specialist and sub-prime lenders, including GMAC-RFC, Edeus, Mortgages plc, Wave Lending and Platform.

Precise Mortgages managing director Alan Cleary believes the emergence of the deal shows investors are more confident in investing in UK RMBS.

He says: “We have seen other prime issuance oversubscribed, so the natural place to go is into non-conforming securiti-sations in a market that is more fluid.”
John Charcol senior technical manager Ray Boulger also sees the deal as a positive sign.

He says: “This is good news. The more the securitisation market opens up to different types of mortgages, the more it suggests investor confidence is returning.”

But Intermediary Mortgage Lenders Association executive director Peter Williams says there is a long way to go before conditions improve significantly.

He says: “We are a long way off the fully fledged securitisation market that takes a wide spread of risk and which we had before.”

Boulger believes increased confidence in securitisations could be rocked by developments in Greece as the country is widely expected to default on its debts unless it receives a bailout from the International Monetary Fund and the European Union.

He thinks this could create a contagion effect and result in the wholesale markets freezing again.

Boulger says: “When Greece does default, it is hard to know how far it is going to spread. Bearing in mind that when Lehman Brothers defaulted, the RMBS market closed.

“The banks did not know who had got the dodgy products. The whole thing froze and there was virtually no trading in the secondary market. Investors were not prepared to place any trust in issues.”

However, Cleary believes funding is not the main factor holding back lending right now and says it is more to do with a lack of consumer demand for mortgage finance, due to the state of the economy and their own finances.

He says: “Borrowers are not borrowing money because they do not think they can get a mortgage, have not got a big enough deposit and are nervous about the economy and their financial situation.”

But he says the re-emergence of the wholesale market means lenders will be in a better position to meet needs when the demand for mortgages increases.


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