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Sub-prime securitisations could return to the UK


Sub-prime securitisations could return to the UK, according to industry experts, although they are likely to be less risky and more tailored to buyers than pre-credit crunch examples.

The topic was thrust into the spotlight last week with the news that Fitch and DBRS had rated the first US sub-prime mortgage-backed securitisation since the financial crash.

Sub-prime securitisations received much of the blame for sparking the crisis and fell out of favour with lenders and investors.

But Clayton Euro Risk chief executive Tony Ward thinks any future UK sub-prime securitisations are likely to be more tailored than previous mass-market offerings. This is partly due to tougher regulation, such as capital requirements for buyers and rules demanding sellers retain 5 per cent of the risk on their own balance sheets.

Ward says: “It is more likely that originators will identify buyers – such as pension or investment funds – and construct portfolios specifically for them. They are securitisations, but are designed to meet an investor’s bespoke requirements.

“If the investor has a minimum yield requirement, this may require near-prime and sub-prime loans to form part of that package. But there will be much more oversight than there used to be. Investors want a Savile Row solution rather than something off the peg.”

Although currently there is little lender appetite for UK sub-prime business, this could change if investors demanded it, according to John Charcol senior technical manager Ray Boulger.

He says: “I doubt any of the lenders in that market are doing enough business [for a securitisation].

“But the fact that the first such securitisation since the credit crunch has been done in the US clearly sets the tone, and there is a strong possibility that we could see something similar happening in the UK.

“Not this year, maybe not even next year, but it’s setting the direction of travel.”

Investor demand could also prompt lenders in the adverse credit market to accept more business, Boulger adds.

He says: “Certainly, the more appetite there is from investors to offer this sort of mortgage, the easier it becomes for lenders to offer it.”

Fleet Mortgages chief executive Bob Young agrees there is demand for this type of lending.

He says: “Is there appetite from borrowers? Yes, there is, and brokers would like to have more sub-prime back in the market.

“Is there investor appetite, from a bond perspective? The answer is, if the yield is big enough there will be interest.”

But Young says there are strings attached.

“Will banks like HSBC and RBS, which supply warehouse facilities, provide them? If they don’t provide the warehousing because they think there will be no interest from investors, it won’t happen. The final kicker is: will the FCA allow it?”

But Paragon Mortgages managing director John Heron doubts whether the bonds can return to the UK. He says: “Although all sorts of things are possible with financial engineering, I don’t see any prospect of material levels of sub-prime loans being generated in the UK market.

“Regardless of investor sentiment, lender behaviour is underpinned by a number of things, not least their own approach to prudent lending. But underpinning that is a very tough conduct-of-business regime that lenders cannot breach. I cannot see any basis on which you could see a return to so-called sub-prime lending in the UK.”

The $161.7m (£113m) bond that was launched last week is backed by mortgages from US lender Caliber Home Loans and marketed by Credit Suisse, according to the Financial Times. Hedge fund Lone Star bought the bond.

Fitch says the deal will be a “trailblazer” and similar offers are likely to follow in the third quarter.



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