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UK lenders warm to securitisation

Securitisation is becoming more mainstream in the UK. For the uninitiated, this is a form of asset-backed finance whereby a lender can refinance mortgage assets by pooling them and selling them on to investors through a special purpose vehicle in the form of residential mortgage-backed securities.

The capital and interest paid by customers passes to investors facilitated by organisations that service the mortgages, although in many cases these may not be the banks that lent the money or originated the assets.

Other third parties ensuring that mortgage payments are passed on to investors are the liquidity and interest swap providers. These organisations are contractually bound to provide services for an SPV that has been created to facilitate an RMBS transaction.

These transactions are generally structured to isolate and protect SPVs against the credit risks of the companies involved.

As a result of this, the repayment risk of RMBS is linked to cash flows released by the securitised assets which may have a low aggregate risk profile.

This is one of the main drivers behind the competitive margins that are achievable under RMBS programmes as compared with unsecured funding.

The UK market has been at the forefront of fresh RMBS issuance growth. Volumes as of September 30 2006 amounted to 51.7bn, an increase of more than 45% compared with 2005. The strong expansion in the securitisation of prime mortgage assets that was seen in 2006 was mainly responsible for this growth.

Sub-prime issuance (i.e. specialist lending assets such as buy-to-let, sub-prime, near prime and self-certified mortgages) also increased in 2006 compared with 2005 by 8%, and total issuance amounted to 12.4bn.

Large financial institutions such as HBOS, Northern Rock and Alliance & Leicester typically raise funding through a variety of sources such as retail deposits and longer term debt issuance.

Credit rating agencies provide objective credit analysis to potential investors and ensure the smooth execution of securitisation programmes.

This market is expected to continue to be an attractive source of funding for lenders with more RMBS transactions expected this year.

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