Mortgage Funding and Securitization in the UK

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					   A Datamonitor report



   Mortgage Funding and
   Securitization in the UK
   The Last Battle Line in the Mortgage Market


   Published: Feb-05   Product Code: DMFS1724
                                                Providing you with:
                                                • Insightful qualitative primary research
                                                  illustrating the views of senior insiders of
                                                  the UK RMBS market

                                                • A series of case studies illustrating
                                                  experiences of the leading players in the
                                                  UK RMBS market


       Use this report to…                      • Comprehensive assessment of different
                                                  objectives behind mortgage securitization
                                                  in the UK
       Improve your understanding of the
       mortgage securitization process          • Discussion of the potential future
                                                  developments in the UK RMBS market,
       against the background of the
                                                  drawing on Datamonitor's proprietary
       latest developments in the UK              five-year forecasts of the mortgage market
       RMBS market




www.datamonitor.com/financial
Mortgage Funding and Securitization in the UK
DMFS1724




      An introduction to the report
                                                This report explains the concept of mortgage securitization,
                                                providing historical background to this funding method and
                                                an overview of the US and European markets. It examines
                                                the characteristics of the UK RMBS market in detail,
                                                drawing on a wealth of primary interview data with senior
                                                figures in the industry.

                                                In order to ensure that the mortgage market remains buoyant, lenders require
                                                constant access to sufficient funds. Traditionally, lenders relied on retail deposits or
                                                inter-bank loans to provide this source of funding. However, those providers who do
                                                not have the luxury of an established and reliable retail deposit base, or high credit
                                                rating necessary for cheap money market credit, are forced to look elsewhere.
                                                Securitization of originated mortgage loans can provide the answer.


      Key findings and highlights
                                                • In order to be a viable business solution, securitization should not just amount to
                                                   an one-off deal but should be embedded as a key part of the company’s
                                                   strategy and business rationale. The company must embrace all aspects of this
                                                   technique fully and integrate securitization into its business philosophy.
                                                • It is fair to say that today’s investors are warming up to retail mortgage markets
                                                   and, in the words of one industry source, ‘are prepared to go down the credit
                                                   curve’. As a result, many MBS issues are over-subscribed despite their large
                                                   size.
                                                • The whole loan sales market has been exhibiting impressive growth rates over
                                                   recent years, becoming increasingly popular for those independent providers
                                                   who securitize but who do not want it to be their sole process of maintaining
                                                   funding liquidity.


      Reasons to buy
                                                • Improve your understanding of the mortgage securitization process against
                                                   the background of the latest developments in the UK RMBS market
                                                • Gain an insight into the views and experiences of the leading UK mortgage
                                                   securitizers
                                                • Plan your business strategy with confidence using Datamonitor proprietary
                                                   forecasts of the UK mortgage market




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                                www.datamonitor.com/financial




                                                                     Sample pages from the report




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Mortgage Funding and Securitization in the UK
DMFS1724




      Table of contents
      EXECUTIVE SUMMARY                                                       •   Microeconomic drivers of the UK RMBS market
                                                                                  - The development of the non-standard mortgage sector has
      INTRODUCTION
                                                                                    made securitization a common funding method
                                                                                  - Stagnating retail deposits and increasing competition in the
      OVERVIEW AND HISTORICAL BACKGROUND
                                                                                    mortgage market caused providers to look elsewhere for
      •    Introduction
                                                                                    funding options
      •    What is mortgage securitization?
                                                                                  - In the current Basel 1 environment providers have many
           - The process of mortgage securitization explained
                                                                                    incentives to securitize
             -    Bankruptcy-remoteness of the SPV is an important feature
                  of a true-sale securitization
                                                                              OBJECTIVES OF RM SECURITIZATION
             -    Issues have to be rated by the credit rating agencies
                                                                              •   Introduction
             -    Various credit enhancement techniques can guarantee the
                                                                              •   Securitization as the main method of funding
                  desired risk profile of the issue
                                                                                  - Overview
           - Securitization can bring a number of advantages to all parties
                                                                                  - Competitors
             concerned
                                                                                    -    Case study – GMAC-RFC
           - But there are also some drawbacks
                                                                                  - Costs and issues
             -    The requirement to establish an SPV adds to the
                                                                                    -    Credit enhancement and the role of credit rating agencies
                  complexity of the securitization process
                                                                                    -    Securitizing high-adverse mortgage products
             -    The degree of reporting required is much higher
                                                                                    -    The effect of securitization on sub-prime mortgage product
             -    The need for additional advisors means extra expense
                                                                                         offering
      •    The birth of phenomenon – The RMBS market in the USA
                                                                              •   Securitization as a method of funding diversification
           - A number of factors have combined to create a favorable
                                                                                  - Overview
             climate for securitization in the USA
                                                                                  - Competitors
      •    Securitization in Europe – A brief overview
                                                                                    -    Case study – Northern Rock
           - Booming house markets are partly to blame for the growing
                                                                                  - Costs and issues
             popularity of securitization in Europe
                                                                                    -    Master trust structures are an important feature of the
           - Brief overviews of the selected European RMBS markets
                                                                                         prime RMBS market
             -    Denmark
                                                                              •   Securitization as a method of risk transfer
             -    France
                                                                                  - Overview
             -    Germany
                                                                                  - Competitors
      •    The development of the RMBS market in the UK
                                                                                    -    The first UK synthetic securitization transaction – Bristol &
           - The historical background to the UK market
                                                                                         West
                                                                                  - Costs and issues
      THE UK RMBS MARKET IN 2004
                                                                              •   Securitization as a method of balance sheet management
      •    Introduction
                                                                                  - Overview
      •    Statistics for the UK RMBS market
                                                                                  - Competitors
      •    Macroeconomic drivers of the UK RMBS market
                                                                                    -    Case study – Egg's synthetic securitization of mortgage
           - House prices have been a strong driver behind the growth of
                                                                                         receivables
             the RMBS market
                                                                                  - Costs and issues
           - The UK mortgage market has flourished in the environment of
             low base rates
           - Investor demand for mortgage-backed securities has been
             strong




          “...The last battle line in the mortgage market is funding. The companies are
                   abandoning the idea of the end-to-end mortgage provision...”

                                                                                                                                     Interview quotation
                                        www.datamonitor.com/financial




   ALTERNATIVE METHODS OF FUNDING                                             •   Macroeconomic factors and the state of the mortgage market
   •   Introduction                                                               will be an important determinant of how the RMBS market will
   •   Whole loan sales                                                           perform in the future
       - Overview                                                                 - What is going to happen to UK house prices?
       - Competitors                                                                -     Sharp correction or soft landing? – Datamonitor's view of
       - WLS vs securitization                                                            the future of the housing market
       - What do lenders think about WLS?                                         - What impact will the environment of rising base rates have on
         -    The Retail Banking Team View                                          the affordability of mortgage debt and house prices?
   •   Covered mortgage bonds                                                     - Datamonitor forecasts for the mortgage market reflect the
       - Overview                                                                   current level of uncertainty
       - Competitors                                                                -     What effect will these forecasts and assumptions have on
         -    Case study – HBOS                                                           the UK RMBS market?
       - Covered bonds vs securitization                                      •   Conclusion
         -    The Retail Banking Team View
                                                                              APPENDIX
   OUTLOOK FOR THE UK RMBS MARKET IN THE FUTURE
                                                                              TABLES
   •   Introduction
                                                                              Table 1:    European RMBS issuance comparison, 2003-2004
   •   Regulatory initiatives such as Basel ll will have a
                                                                              Table 2:    Securitization accounted for 10.6 per cent of total
       considerable impact on the UK RMSB market
                                                                                          mortgage loans outstanding, Q3 2004
       - Basel ll standards will link capital adequacy requirements for
                                                                              Table 3:    New risk weights (standardized approach), according to
         banks more directly to risk
                                                                                          Basel ll
         -    A declared objective of Basel ll is to remove all regulatory
                                                                              Table 4:    Recent competitive developments within the non-standard
              incentives for securitization
                                                                                          mortgage market
         -    Credit rating agencies will play an even more important
                                                                              Table 5:    Economic forecasts used in Datamonitor's neutral
              rule under the new proposals
                                                                                          scenario forecast for the UK mortgage market,
         -    Therefore, the potential impact of Basel ll on securitization
                                                                                          2004-2009f
              can be summed up as follows: Implementation efforts will
                                                                              Table 6:    European 2005 YTD supply by asset class, February
              mean considerable allocation of resources
                                                                                          2005
   •   Consolidation and fragmentation of provision are two
                                                                              Table 7:    Average house price in the UK, 1995-2004e
       mortgage sector trends which are likely to affect the RMBS
                                                                              Table 8:    The growth of total mortgage balances outstanding,
       market in the future
                                                                                          1995-2004e
       - Consolidation in the non-conforming sector can affect lenders'
                                                                              Table 9:    Total mortgage gross advances, forecasted to 2009
         securitization strategies
                                                                                          according to the Datamonitor neutral scenario, 1994-2009f
         -    How can greater consolidation in the mortgage market
              impact on the RMBS market?
                                                                              FIGURES
         -    Providers' view of the consolidation argument
                                                                              Figure 1:   Typical RM securitization structure
       - Fragmentation of mortgage provision
                                                                              Figure 2:   HBOS dominates the UK market, with EUR 20.8 billion of
         -    Providers' view of the fragmentation of provision argument
                                                                                          RMBS issuance as of 2004
         -    How can greater fragmentation of mortgage provision
                                                                              Figure 3:   Total mortgage gross advances are forecasted to fall to
              impact on the RMBS market?
                                                                                          £263.6 billion by 2007 before returning to growth,
                                                                                          1994-2009f




  “...The total volume of future UK RMBS issuance will ultimately depend in part on
    whether the large banks decide to set up covered bond programs and to what
                   extent they will replace the master trust issuance...”

Mortgage Funding and Securitization in the UK
Mortgage Funding and Securitization in the UK
DMFS1724




      Figure 4:   Typical RM securitization structure
      Figure 5:   A typical rating scale
      Figure 6:   The US RMBS market is dominated by the three GSEs
      Figure 7:   RMBS accounted for 75 per cent of the total European
                  asset-backed securities as of February 2005
      Figure 8:   HBOS dominates the UK market, with EUR 20.8 billion of
                  RMBS issuance as of 2004
      Figure 9:   The price of an average house in the UK has increased
                  by 145 per cent over the last ten years, 1995-2004e
      Figure 10: While approvals fell in 2004, average loan sizes continued
                  to grow strongly, 2000-2004e
      Figure 11: Total mortgage receivables have increased by 124.6 per
                  cent since 1995, 1995-2004e
      Figure 12: While interest rates have risen five times since 2003, they
                  remain at a sufficiently low level to continue making
                  borrowing attractive for consumers, 1995-2004
      Figure 13: Relationship between originator and counterparty in
                  Bristol & West's synthetic securitization transaction, June
                  2000
      Figure 14: The mechanics of the mortgage bond issuance
      Figure 15: Halifax reported monthly declines in house prices towards
                  the end of 2004, January 1994 to November 2004
      Figure 16: Despite house price growth, average mortgage
                  repayments as a proportion of take-home pay remain
                  relatively low, 1980-2004
      Figure 17: Total mortgage gross advances are forecasted to fall to
                  £263.6 billion by 2007 before returning to growth,
                  1994-2009f
      Figure 18: Datamonitor's core consulting capabilities




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