The smaller mortgage market players are pooling their resources and gaining ground in securitisation.
Securitisation is now firmly established as a mainstream funding technique in the UK mortgage market but it demands high levels of admin expertise.
It is taking off in the UK as more and more lenders respond to competitive pressure from new entrants.
But to gain full advantage, lenders need to be able to show they have the ability to manage far more complex procedures.
A bond-based system, where providers can keep on lending the same amount at virtually no risk with virtually no capital of their own, is good news for the provider and the bondholder, who gets a yield normally higher than gilts.
It is also good news for the borrower who, because of competition, benefits from greater choice and availability and lower rates.
But first the lender must be able to satisfy the security ratings agency that exacting reporting requirements can be met and that means demonstrating the ability to operate a system which is much more complicated and demands far more sophisticated methods than required for normal mortgages.
Many providers are overcoming the problem by turning to outsourcing. These are not only new entrants and established houses but also smaller lenders which are now able to compete on a level playing field with their bigger counterparts.
By pooling their resources – form-ing a co-operative, if you like – and turning to a third-party administrator, they can collectively achieve the same economies of scale and compete for mar-ket share on the same footing as much bigger providers.
There are a number of reasons for the renewed growth in securitisation. This technique first emerged in the UK in the late 1980s but suffered a hiatus when a crash in the market saw off many of the new entrants which relied upon it entirely.
A low-cost, low-risk method of funding, it means a new generation of non-traditional lenders can enter the market with little capital requirement and without the need for branch networks and big numbers of staff.
At the same time, it also means that existing lenders, which are under pressure as competition increases, can find new products and services while keep-ing their overheads to a minimum.
Coupled with an effective and efficient mortgage outsourcing service, securitisation has brought enormous advantages to new and existing lenders.
Not only do they acquire the ability to lend continuously but their portfolios under administration and management continue to grow, yielding a small return.
Since they have not had to advance any of their own funds or take any of the associated risk, they are able to free capital, avoiding the need to hold funds in reserve against default.
However, it is not only the lenders which benefit from securitisation – I believe it is a win-win situation for all involved. For the bondholder, there is a secure investment at an attractive yield.
In the US, mortgage-backed bonds, which are secured on monthly payments made by borrowers, are popular for private investors and these are catching on in Europe where, to date, they have only been bought by institutions and private bank clients.
For the borrower, there are more competitive mortgages along with a potential reduction in interest rates and the introduction of long-term fixed and capped-rate products.
Borrowers should also benefit from exceptional new levels of service. Facili-ties such as having information readily available online and the ability to update that information quickly are just some of the advantages of increasing use of specialist, outsourced mortgage admin by lenders.
They have found that TPA is the best answer for the complex challenges thrown up by the need to securitise loan pools which do not fit the vanilla mort-gage criteria, challenges that include issues such as the securitisation of flexible mortgage portfolios and shared appreciation mortgages.
As securitisation at last takes off in the UK, it is essential for mortgage providers to have the ability to manage efficiently the complexities of securitised lending, allowing them, consumers and bondholders alike, to gain the tremendous advantages up for grabs.
Richard Swan Product director mortgages, Marlborough Stirling