| Time to feel confident about the mortgage market |
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Investor interest could spell more funding for lenders and therefore more competitive mortgage deals for you.
At the start of the month, Lloyds Banking Group launched a massive residential mortgage-backed securitisation (RMBS) deal, and investor interest was very strong indeed. So strong that the size of the original issue was extended to cope with the increased demand.
This bodes well for UK mortgage borrowers because it marks a further move towards the reopening of the securitisation markets, and that could open up billions of |
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| How does it work? |
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Lenders fund their mortgages in two ways -- either by using the money they get in as retail deposits (our savings), or by packaging up the mortgages they sell and selling them on to investors around the world. These investors provide further funds for lenders to lend, allowing them to sell more mortgages to package up to sell to investors.
It was considered a virtuous circle up to mid-2007, but became more of a vicious one when investors started getting the jitters about the value of the packaged mortgages they had bought. Once they noticed that US borrowers had been lent money they could never have afforded to repay, and were defaulting in their droves, investors decided that buying mortgages was perhaps not such a safe bet after all.
The house of cards well and truly collapsed as has been well documented, and the flow of funding to lenders dried up pretty quickly -- the credit crunch.
Farewell to funding
This was a massive problem because many UK lenders had become overly dependent on this wholesale funding market. Indeed, since some lenders didn’t have a deposit-taking arm they were 100% reliant on selling their mortgages on.
Even the banks that did attract retail deposits still got into the situation where the majority of their funding was coming from wholesale investors, so the credit crunch clearly had an enormous impact on their capacity to lend -- Northern Rock was the most high profile example.
One interesting point is that, because of their legal structure, building societies have to fund at least 50% of their lending from deposits, so they were never as exposed to the credit markets as other lenders. In practice, around 70% of building society mortgages were funded from deposits not the secondary funding markets pre-crunch, leaving them less exposed than banks. They have still been indirectly battered by the impact of the credit crunch and many are, perhaps justifiably, pretty miffed about a crisis they believe was caused by other institutions.
Light at the end of the tunnel
It is now widely believed that we will never get back to the heady days of 2006 and 2007 when investors were keen to snap up any packages of mortgages, no matter how risky. And most people think that’s a good thing. |
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