-- Neil Unmack is a Reuters columnist. The opinions expressed
are his own --
By Neil Unmack
LONDON Oct 27 Is mortgage securitisation
making a comeback? Nationwide Building Society (POB_p.L) has
just sold 3.5 billion pounds of mortgage-backed bonds, just the
second deal this year after a similar transaction by Lloyds
(LLOY.L) last month.
The fact that two large transactions have happened is a
good sign, but the market is still some way from recovery.
Nationwide and Lloyds have shown how much the market has
improved since the collapse of Lehman Brothers last year, which
effectively killed off demand for asset-backed securities (ABS)
A functioning market is needed to help finance mortgage
borrowing and wean Europe's banks off government support taken
on during the credit crisis.
Low interest rates have brought new funds into the market,
making it cheaper for banks to issue. However, asset-backed
debt is still expensive compared to other forms of bank
funding, and the investor base for these securities is a
fraction of what it was.
Nationwide must pay at least 145 basis points over Libor on
its new MBS. But the UK mutual's covered bonds, another kind of
secured debt, are trading somewhere around 85 basis points over
Libor, while its senior unsecured debt for 10 years is about
130 basis points over swaps.
Interest costs alone aren't the only factor, however.
Asset-backed debt requires less collateral than covered bonds,
reducing the total cost. Then there's the benefit of
diversification. Regulators are encouraging banks to increase
their longer-dated funding, meaning they need to consider all
kinds of secured borrowing, including ABS.
Nationwide has clearly decided these benefits are worth the
cost of paying up a little more. Other lenders may well follow
suit. But for larger UK banks securitisation is still an
expensive funding option compared to unsecured debt, which
benefits from implicit government support.
Moreover, the new investor base remains untested. The boom
years were fuelled by leveraged funds such as structured
investment vehicles. But these have disappeared, and new
investors need to earn an adequate return without borrowing.
Indeed, demand has been so uncertain that both Nationwide
and Lloyds sold a large chunk of their transactions to JPMorgan
(JPM.N) before offering the remainder to other investors.
Nationwide and Lloyds are effectively betting that investor
confidence will recover, lowering borrowing costs and making
the market for mortgage-backed securities viable again.
So far this has worked well for JPMorgan, which bought 1.25
billion pounds of Lloyds' deal in September, and is sitting on
a paper profit of at least a percentage point after the bonds
rallied in recent weeks. But some new investors may prove
fickle if yields rise in other bond markets, or if defaults
start to climb again.
Nationwide may have helped to restore confidence to the
market for mortgage-backed securities. However, the changes in
the investor base means the market will inevitably be smaller,
and more expensive for issuers, than it was during the boom.
-- For previous columns, Reuters customers can click on
(Editing by David Evans)