Race is on for retail funding

Although the launch of a £2.5bn retail mortgage-backed securities deal from The Co-operative Bank was a further sign that the securitisation market is continuing to thaw, there’s no getting away from the fact that it’s still not functioning properly.

Without securitisation, there is no exit for loans originated, and the only viable model is deposit-based lending. Well, that’s the theory. The result of deposit funding being the only game worth playing is that competition is fierce, especially from the government. With state borrowing hitting new highs, lenders are going to need to fund that somehow, which will lead to National Savings & Investments aggressively netting savers’ cash.

Hometrack research shows that last year was the worst since the 1950s for retail funding and it doesn’t look like things will improve in 2010. If anything, with new entrants queuing up to enter the market, competition will get even worse.

Gone are the days of the creator and trader. All new entrants seem to be looking to target the savings market, from Virgin Money to The Home & Savings Bank.

The renaming last week of Stephen Knight’s Checkmate Mortgages to Portillion was more than a cosmetic touch-up as there were signs that Knight, who wrote the book on creating and trading, was looking to retail deposits as a potential source of funding. He has beefed up his team with Philip Dearing, former chief executive officer of Market Harborough Building Society and managing director of Mutual One, as director of savings.

With the securitisation market still closed, retail funding is a logical avenue for prospective lenders to pursue. But with competition fierce, firms looking to tap the savings market for funding will have an uphill struggle.