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Return to securitisation boom ruled out

Much of the securitisation which was used to fund mortgage lending before the credit crisis will not return, says FSA chairman Lord Turner.

Speaking yesterday at a Treasury select committee meeting, Turner was asked if he believed there could be a mortgage market recovery without a securitisation revival. He said: “I think we can have a recovery without securitisation, it will be easier with it but we have to be realistic. Quite a lot of what was previously securitisation was based upon unsafe forms of maturity transformation and is not coming back.”

He said UK residential mortgage-backed securities ending up in the hands of investors seeking short-term profit rather than long-term investors had undermined their sustainability.

He said: “If UK residential mortgages were being securitised and ending up in the hands of natural buyers of long-term assets, then you would have a sustainable non-bank form of mortgage credit intermediation. That is hardly what was occurring at all, almost all the UK RMBS were ending up in the hands of mainly US investors who thought they had a short-term asset.”


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. In 1974, the secondary banking crisis was the result of Banks borrowing short term and lending long term. The message then as it is today, is that mortgage backed securities are not for short term profit but for long term investment. It behoves all Financial Institutions involved with mortgage backed securities to take Lord Turner’s message on board, as it is the best way to avoid another crippling credit crunch and perhaps this time to learn from history!

  2. I agree, but the end of securitisation is the end of the intermediary as lenders are happier to deal directly and cut out the commission. This demise is also stopping good new lenders such as Portillion et al from entering the intermediary market as they cannot get funding.

  3. Lord Turner is right inasmuch as confidence has been undermined in the market and unlikely to return in the way it was, but I take exception to his notion that sterling based assets were they same as those toxic loans backing many American RMBS.
    There were a huge number of mortgages that were repackaged into RMBS that were never a problem as they were prime and unlikely to be a problem and still are not.
    It is a question of everybody being tarred with the same brush. There is amble room in the market for prime debt to be repackaged, the problem is the loss of confidence and the fear as a result of the bad practices started over there that started to work into our system over here. Even then they were mild compared with the American experience. The villians here were the American investment banks who typically were over aggresive and now of course have cut and run from the market leaving a trail of damage behind them.
    Working on the true transparency of the underlying securites and the undewriting lender having a larger take up of liability on RMBS issues will help in bringing back confidence so investors can be comfortable with the risks.
    There is £300 billion of outstanding RMBS type issues out there representing around 1/4 of the mortgage market that in many cases needs refunding over the next few years. Without a viable RMBS market where will the retail deposits come to refund let alone allow any more new mortgage funding Lord Turner?

  4. There are a number of issues that impact the market and viability of RMBS.

    Years ago people moved regulalry, trading up, and thus the average mortgage term was 7 years – wonder what it is today?

    The re-mortgage market was by far the biggest proportion of mortgages. The average fixed rate term was around 3 years so ‘long term’ mortgages actually didn’t last that long as they were quite often re-mortgaged away.

    These must have been influencing factors for people buying RMBS when considering the term and risk.

    Since these aspects are likely to be considerably different going forward this must surely be a big influencer on who is willing to buy RMBS.

    The type of investors wanting RMBS will therefore be more limited and there may well be a natural cap on the amount of RMBS they want in their asset mix.

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