While the last couple of years have been relatively quiet in terms of overall volumes of securitisations, a number of lenders are still actively issuing deals, with regular transactions from Paragon, Kensington Mortgages, Mars Capital, Skipton Building Society, Principality, Santander and Precise Mortgages.
There have also been deals from Bluestone Mortgages (formerly Basinghall Finance), CarVal (through its subsidiary Commercial First), Aldermore Bank and a recent return to the public securitisation market from The Co-operative Bank. The pipeline of new deals due to come to the market from these lenders and others is also relatively strong.
The sale of legacy portfolios is also currently robust, with several large transactions having gone through and many more in the pipeline. As brokers will know from being on the frontline during the golden era of mortgage lending, many lenders wrote large volumes of business that supported the sale of loans such as sub-prime, self-cert and interest-only.
Many retail lenders still have these assets sitting on their balance sheets and they take up significant resources to manage – not to mention causing a distraction from new business. HML is seeing an increase in activity within the market where investment managers, investment banks, hedge funds and insurers are showing a desire to invest in mortgage assets to achieve short-term returns or long-dated yield.
The improving cost of securitisation and economic sentiment
Supporting this buoyant buying and selling environment are improving securitisation funding costs over the last 18-24 months. Of course, this is not without the odd ‘wobble’ and some nervousness in the market, with recent events in the eurozone being an example of a situation that can cause issuers to hold back from securitising portfolios.
Improvements have, in part, been due to the absence of the traditionally big issuers (outside of two relatively small deals from Santander) leaving smaller players to satisfy the investor demand for UK residential mortgage risk. These improvements sit alongside the improving economic picture in the UK and benign interest rate.
According to a recent Moody’s report, ten securitisations of pre-crisis legacy assets came to the market over the last 18 months, boosting the share that these types of deals claim in the overall UK RMBS market, while new mortgage market entrants have issued five transactions, collectively worth £1.5bn over the same period.
So, what do these securitisation improvements mean for brokers? As activity continues to increase, lenders – particularly those new to the market – will be able to unlock funding to carry out more lending, which in turn should increase competition and supply.
While traditional lenders are always a firm focus for brokers, having access to more innovative and newer lenders will no doubt be a breath of fresh air.
But there are some caveats…
Increased securitisation activity spells good news for brokers, but there is one major milestone on the horizon that our industry needs to be aware of. IFRS9 is a new international accounting standard that comes into effect in January 2018 and will affect mortgage lenders and special purpose vehicles.
Under IFRS9, a lender must reassess the probability of any of their customers defaulting and the resulting expected losses for all exposures – and this will need to be carried out each reporting period. IFRS9 will replace IAS39, under which mortgage lenders just need to calculate an expected loss value for those accounts that are currently impaired.
The challenge for lenders is that historic data will be required to carry out new calculations. New systems, scorecards and processes will need to be developed and a Deloitte survey from last year said there could be a 50 per cent increase in impairment charges as a result of IFRS9. If lenders do not prepare for this regulation now or have robust models in place, they could end up forecasting higher potential expected losses. And in turn, this may restrict their lending appetite and have an impact on business volumes for brokers.
As my colleague Damian Riley, director of business intelligence at HML, puts it: “In order to have sufficient information to measure changes in asset quality, a history of measured risk is required, the benchmark being at origination or when the mortgage assets were taken onto the lender’s balance sheet.
“This could require a retrospective exercise, something which cannot be done overnight. Advisors are suggesting this could take up to three years. Using a third-party with a unique data pool and powerful advanced analytics will provide lenders with an accurate view of each mortgage account’s probability of default, removing the administrative headache for mortgage lenders, SPVs and other portfolio owners.”
With the slow return of the securitisation markets to what some would consider ‘normality’, new lenders that are looking to access the market for funding will need to consider how they can satisfy all of the new regulations around the levels of disclosure required on deals, as well as future changes in the regulation and accounting practices.
Brokers would be wise to ensure they regularly check-in with the lenders they use to get a sense for new lending appetite and whether tasks such as being ready for the implementation of IFRS9 are being planned for now to ensure lenders and their brokers are well placed to take advantage of increasing economic sentiment.