Speakers and attendees at the event, Funding the UK Mortgage Industry, concurred that new solutions must be found to raise wholesale funding, with a revival of the residential mortgage backed securities (RMBS) market a cornerstone.
Tony Ward, managing director of Home Funding and the driving force behind the conference, said: “Securitisation will re-emerge – it has to”.
He pointed out that Adair Turner, the chairman of the FSA, while making ‘harsh’ comments about RMBS in an address at Cass Business School last week also said that securitisation was very likely to play a role going forward.
Ward also quoted Bank of England Governor Mervyn King’s recent speech to the Treasury, in which he said that it is “vital that firms revise these [securitisation] strategies” in order to plug the gap which will be left when the Special Liquidity Scheme comes to an end.
Rob Thomas, senior policy adviser at the CML, said measures need to be taken to encourage domestic investors to buy into RMBS. He claimed that since the credit crisis, the tripartite of the Treasury, the Bank of England and the FSA has adopted a ‘wholesale funding bad’ attitude, which risks blinding it to the benefits of securitisation.
Thomas insisted: “There is an opportunity here – the question is how you get UK institutions to buy UK mortgage paper.”
Thomas pointed out that pension funds, for example, prefer longer-term fixed paper than is currently available, and suggested that it might be worth revisiting the Miles Report, which looked at the possibility of the UK mortgage market moving towards longer-term fixed rate mortgage borrowing.
Robert Plehn, head of securitisation at Lloyds Banking Group, said: “There is a big debate to be had. The Government thinks that UK funds can support a recovery in the mortgage market. I don’t buy that. I think we need to look abroad and bring back external investors into the market.”
Plehn pointed out that UK RMBS look very attractive compared to American RMBS, because the underlying mortgages here are far higher quality than US mortgages.
Lloyds issued a securitisation in January which included a dollar-denominated tranche which was very popular with American investors.
Plehn added: “There is a lot of potential for selling UK RMBS to US investors because the quality of the product is superior. The challenge is getting US investors to engage with us in the first place.”
Conference attendees also agreed that the proposed end dates for the Government’s support schemes are unrealistic. The Special Liquidity Scheme, which has so far provided £185bn of relatively cheap funding to mortgage lenders, is to be withdrawn and the money must be repaid to the Bank of England by 2012. Under the Credit Guarantee Scheme, £134bn worth of redeeming bonds need to be refinanced by 2014.
Thomas said: “It is not obvious to me that the capacity is there to repay the schemes under the current timescales. Even with growth in retail funds of £60bn a year, it would still take five years to fill this funding gap.”
