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Mortgage Backed green shoot

Lloyds Banking Group launched a £4bn Residential Mortgage Backed Security this week, the first such issuance for more than a year.

Two years after wholesale markets all over the world shut up shop and the mortgage market fell to its knees are we now seeing the first semblance of real wholesale action returning – is this the very first real green shoot to appear in the sector?

Lloyds finalised its AAA bond, equivalent to £4bn, on Wednesday. It was made up of prime, Halifax loans with an average loan to value of less than 70 per cent, issued through the Permanent master trust. The first £1.65bn tranche was placed with an investor, while an additional £1.65bn tranche was up for sale alongside a euro 750m tranche.

This was the first time Lloyds made such an issuance since May 2008. The last time any UK mortgage lender issued an RMBS was Alliance & Leicester in August 2008.

At its peak in 2007, the buying and selling of RMBS between investment banks, retail banks and building societies fuelled the lion’s share of 2006’s £345.4bn and 2007’s £363.6bn gross mortgage markets – without the wholesale market in 2009, lending will have shrunk to around £145bn according to the Council of Mortgage Lenders’ forecast.

The Lloyds issuance was not only a welcome surprise to the market, but it was also a roaring success – reports suggest that investors from 16 countries round the world were attracted to the deal.

So is this a real green shoot? Mortgage professionals are sick to death of hearing about the next green shoot – one lender told me that any green shoots this year have been stuck under six feet of snow. But no one would deny that the RMBS market is absolutely key to the regeneration of the mortgage market – more access to funding means more loans, more loans means more competition, which ultimately means higher LTVs and eased credit criteria for all.

Of course it’s very early days yet. The world is still smarting from the biggest financial crash in 70 years, largely fuelled by lenders’ over-reliance on wholesale markets. The regulators of the world are going to be very wary of any lenders buying or selling mortgage-backed assets. They are also going to demand significantly higher capital from those trading lenders, making the deals much less profitable.

It is also prudent to remember that the issuer of this bond, Lloyds, is 43 per cent Government controlled and may be forced to give a majority shareholding to the Government if it joins the Asset Protection Scheme. Will the Government and the British public allow its banks to go back to what Liberal Democrat Shadow Chancellor Vince Cable dubbed “casino banking”?

Is the issuance of an RMBS a green shoot? Or has the snow yet to melt on the wholesale markets?

Tell us what you think below.


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There is one comment at the moment, we would love to hear your opinion too.

  1. How were valuations carried out?
    70% LTV sounds OK if two things are confirmed, the first being that house prices will not fall and secondly that the basis for the property values is not the typical computer software that the lenders us.

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