Monday, October 26, 2009

UK securitisations have been creeping back

Posted in the Guardian by Elena Moya:

Nationwide is set to become the second UK mortgage lender to publicly sell residential mortgage-backed securities – bonds that use homeowner's mortgages as collateral – since the financial crisis last summer.

The technique of selling bonds backed by mortgages or other loans such as for cars or credit card balances, known as securitisation, was widely used during the years before the onset of credit crunch, giving banks a tool to lend more than they could afford and ultimately pushing many to the brink of collapse.

Securitisations have been creeping back as investors seek higher returns at a time when interest rates are at record lows. Tesco, Lloyds, Volkswagen and Ford have carried out securitisation deals over the past four weeks, reviving a market that had barely witnessed any transactions in the first nine months of the year.

"Investors are looking to reinvest in relatively simple asset classes, and for the most recognised names," said Rick Watson, managing director of the European Securitisation Forum. "So we're seeing the beginning of the reopening of the market."

The return of securitisation is seen by analysts as a way to kickstart bank lending, although banks, battling to shore up their books, are likely to remain cautious.

Nationwide's £3.3bn issue will come from Silverstone, a vehicle set up by the mortgage lender, which "has comparatively few problem loans such as interest-only loans and high loan-to-value loans," according to CreditSights, a research firm. The first mortgage-backed deal came from HBOS, owned by Lloyds, which issued a £4bn bond in September.

The issue comes as the UK economy is still shrinking and unemployment rising, traditional signs of rising defaults.

"We remain negative on UK house prices and believe that UK [residential mortgage backed securities] still face risks from low mortgage repayment rates and the risk of rising arrears when interest rates are finally once again increased," Credit Sights said. "That said, Silverstone's pool of mortgages … appears to have fewer loans that could cause problems in the future."

JPMorgan, one of the international banks least affected by the credit crunch, has been one of the top buyers of notes backed by UK residential mortgages.

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