Kensington Mortgage Company, one of the fastest-growing nonconforming lenders in the U.K., has sold 16 residential mortgage-backed deals since 1996, totaling nearly £4 billion.
Some investors have expressed concern over the nonconforming, or subprime, mortgage market in the U.K. because of the prospect of declining housing prices. What's your take on this and do you expect the decline to affect your deals?
I don't think a decline in housing prices will have much of an impact on our deals. Several commentators, particularly in the press, think the housing market is overblown. But, we see house prices falling in isolated areas, but not generally. You do get hot spots where house prices have increased a lot, and that's generally in the more expensive areas and generally where Kensington does not lend money. Our average loan is about 2.8 times one's salary, whereas some prime lenders are lending up to four and five times salary. But, we won't lend as much as them as we tend not to lend in the more expensive areas. Nearly 80% of our lending is for houses that cost less than £250,000, and these are traditional family homes for middle class Britain. We do not lend to the high earners in the expensive areas, although we do have a higher proportion of loans in the Southeast of England, just as every national lender has.
Investors have also expressed some concern that nonconforming lenders may be relaxing their lending criteria to garner new business. How do you respond to this concern?
Across the nonconforming sector, products and underwriting criteria are fairly similar. Everyone is competing with similar products. So, I don't believe it is true that subprime lenders are relaxing their standards. However, prime lenders have been trying to get into the higher end of the sub-prime market, and to do so they have relaxed some standards. But, the sub-prime lenders themselves have been fairly consistent in their lending. And, we're not going to increase our income multiples, because we don't want to take a risk on affordability of the product. We believe the lending criteria is more important than the price. And if there is increased competition, we might have narrower margins. But, we still won't change the criteria, because it is fundamentally important for us.
Chancellor of the ExchequerGordon Brownhas said he is looking into developing a fixed-rate mortgage market in the U.K. to stabilize house prices. Do you have any plans to offer a fixed-rate product and what do you think of Brown's notion of starting a Fannie Mae-styled market in the U.K.?
The founder of our business is American and he's always talked about 30-year fixed-rate loans. But, my personal view is that it would be a difficult product to sell to the U.K. consumer because it is so different than what is currently offered. The U.K. is very much a variable-rate mortgage market. We do offer fixed-rate teasers, for short periods, but there's always the expectation that the loans will revert back to a floating rate. And, because a long-term, fixed-rate mortgage would tend to be higher than a current variable-rate one, culturally I believe it would be a difficult thing to sell to U.K. consumers. The only reasonable expectation is that rates will go up from here, which would make taking out a fixed-rate loan now higher than a floating-rate one. Another reason I believe it would be a hard sell is the British public tend not to take that long-term view, as the average home loan is for about five years, after which people either move or refinance. Culturally, we just don't have that longer-term view.
You recently told BondWeek that you were considering buying whole loans (BW, 5/5). What would be the advantages of doing this?
About a year ago, we formed Kensington Structured Finance, which arranges all of the securitizations that we issue as well as provides advisory services for other issuers of securitizations. The unit is now earning a bit of fee income. As part of that, we are developing a whole loan trading effort as means to further lever up that expertise and skill.
Does Kensington Mortgage Company issue RMBS paper outside the sterling market? And what steps are you taking to expand your investor base?
All of our assets are in sterling, of course, but we have also issued asset-backed deals in dollars and euros. Most European investors are moving toward investing in euros, so we issue in that currency to tap the Continental investor base. And we use dollars to tap not only the American investor base, but also Asian investors who are used to buying dollar-denominated assets. With that in mind, we see dollars as a way to broaden our investor base on a global scale. And, in terms of other exercises, we are always on the road to meet with potential investors, to better enable us to tailor our securities to meet their needs. For example, we have 35-40% our debt in what we call fast-pay bonds, which are less than a year in duration, and are attractive to U.S. money market funds. What we do is we slice up our offerings into different durations and currencies, to make it more attractive to our investors.
On what basis do you select banks to underwrite your deals, and is there room for new banks?
We have a primary relationship to distribute bonds with four banks. In no particular order, these are Barclays Capital, Morgan Stanley, Bear Stearns and Westdeutsche Landesbank. When we establish a relationship with these banks, it covers many different financing components, not just securitization, and includes warehouse financing. Then we will select the leads for a deal from among these four, based on a merit basis. Once we have selected a lead manager, we will go on the road to investors to see what their needs are. However, we are growing quite strongly, and it's important not to fill the capacity of banks. With that in mind, I would certainly be open to adding new relationship banks to the list.