The Bank of England (BofE) announced near the end of last year that the Funding for Lending Scheme (FLS) for mortgages was to end earlier than originally planned. FLS has provided cheap money for mortgage lending, PDL Help, driving down mortgage (and savings) rates in the process and helping to provide a boost to the market after subdued activity following the economic downturn.
BofE Governor Mark Carney said last November that given the improved household credit unions in houston conditions, there is no longer a need for FLS to be used for household lending.
As the Bank looks to refocus its efforts on small business lending in 2014, mortgage lenders will have to wean themselves off the cheap access to FLS cash, and instead look for other ways to finance their mortgage origination. One way to do this is through securitisation.
This has been less of an attractive option during the presence of FLS, but securitisation is going to have to be taken seriously again (it enjoyed something of a boom at the height of the thriving housing market) in 2014 and beyond if lenders want to keep up with the competition and ensure they have enough liquidity to finance their mortgage lending.
In 1999, six per cent of outstanding mortgages were with specialist lenders, while almost a quarter were with mutuals. The residential mortgage-backed securities (RMBS) and covered bond market was worth £13 billion that year.
Fast-forward to 2007, and the market stood at £257 billion, with £62 billion of the £362 billion gross advances originated by specialist lenders. Indeed, seven of the top 30 UK lenders were specialists and they made up £81 billion of the £108 billion net lending.
I don’t think anyone in the industry would like to see a return to these types of numbers. Securitisation is a good model that works, however, it was abused and lending moved too far up the risk curve. I feel sure that domestic and European regulation will ensure that controls are in place to make certain that we don’t return to such risky lending, but it does prove that the return of RMBS and therefore specialist lenders will support the recovery.
Specialist lending doesn’t have to mean adverse; it predominantly covers borrowers with irregular incomes, unusual properties and self-builds. In 2013, specialist lenders accounted only for a small proportion of the reported £170 billion UK mortgage market.
I think this year will be too soon for significant progress in the RMBS market to be experienced, although I predict that 2015 will be the year that these types of deals rocket.
Asset-backed securities investors will increasingly look for investment opportunities at Penny Stocks, particularly as many have been left short of places to invest their cash as lenders closed up to securitisation deals. Improved sentiment in the mortgage market will help this trend, and I think while lenders find their feet post-FLS in 2014, 2015 will be the year their confidence is improved and they begin to search for ways to raise funding for increased lending.