Mortgage players from Iceland are expected to make their debut in the European securitization market next year, according to bankers and rating agency analysts. Kaupthing Bank, Landsbanki and Islandsbanki are among those vying to be the first borrower to sell bonds backed by Icelandic residential mortgages. With growing long-dated mortgage portfolios, lenders who have traditionally funded through the deposit market are now considering structured finance as a funding tool.
The sales would follow a significant change in the Icelandic residential mortgage market this fall. The Housing Finance Fund, a government-owned lending entity, has historically been the lender of choice and has about an 80% share of the residential mortgage market. But commercial lenders, who are experiencing margin pressure in the corporate market, have decided to pursue residential customers more aggressively. After a ruling from the European Free Trade Area Surveillance Authority in August made it clear competitive conditions with regard to the HFF would not change in the commercial banks' favor any time soon, these lenders started ramping up their residential mortgage books. Even though the ruling preserved the status quo, commercial lenders forged ahead with plans to step up their residential businesses.
By offering larger loans than the HFF, as well as a refinancing option, the commercial banks are succeeding in persuading existing HFF customers to refinance their HFF loans and originate new ones with them. "The [Housing Finance] Fund is being repaid on a massive scale," said Stefan Akson, head of bond sales at Kaupthing Bank in Reykjavik. "We've only just entered the market and already have a 34% share of new loans."
Kaupthing's mortgage book is not yet large enough to issue RMBS, but Akson thinks the market could see a securitization from one of the leading banks next year. Officials at Landsbanki and Islandsbanki did not return calls by press time.
Any bond sale would be relatively small, given €10 billion in outstanding residential mortgages in Iceland covering a population of less than 300,000. Nonetheless, investors and analysts anticipate an Icelandic deal would be well-received, given how hungry the market is for diversification and underlying credit quality on par with those of other Nordic countries.
