GlobalCapital Securitization, is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Only radical thinking can get social RMBS going

Derelict building plot surrounded by metal wire fencing and 'keep out' notice.

UK mortgage market is gripped by systemic problems that make it too risky to label RMBS as social

Social UK RMBS is edging back onto the market's radar, but the asset class will struggle to attract investors willing to pay a premium unless there are radical changes to the way UK land ownership works.

There have been a handful of deals — with the first having come from from Kensington Mortgages in 2021 — but Skipton Building Society's new zero deposit product for renters with a 12 month track record has raised the prospect of the market expanding. Indeed, DBRS published a note titled “UK RMBS — Lending with a Social Aspect?”on July 6 in response to Skipton’s announcement.

As of today, RMBS investors do not have social mandates, and the volume of deals is too low for anyone to think about opening a specific social RMBS fund. Moreover, the mixed history of mortgage lending will be enough to put off any existing investors with exclusively social mandates.

As concern about greenwashing has grown, the balance of risk for investors considering such deals has changed. It is not worth the risk of funding an ESG branded project unless you are confident that other people will agree the project matches up to its claims.

Numerous investors have told GlobalCapital as much whenever the subject comes up.

Mixed perception

That is where social RMBS trips up. Mortgages, simply put, do not have a reputation for bringing benefits to society.

For many young people, mortgages are unattainable and seen as inflating property prices — two factors that combine to perpetuate their difficulties in finding affordable housing.

RMBS investors might argue that the opposite is true: that young people benefit most from the mortgage market since it allows them to buy property from future earnings rather than current wealth. And social RMBS goes further and tries to address the very problem of housing affordability by targeting groups that would otherwise be shut out from the mortgage market.

But the problems in the UK’s mortgage market are systemic, and social RMBS alone cannot solve them. There are an array of vicious cycles keeping new buyers out of the market.

As one example, renters cannot save for a deposit because they have to spend money on rent, the problem Skipton aims to address. However, Skipton's solution is partial, as few borrowers will be able to borrow enough under its restrictions.

Those who come from families wealthy enough to help with deposits can get ahead, keeping house prices out of reach for everyone but those with family support.

More demand for rental properties ultimately encourages buy-to-let investors, which further inflates property prices.

During periods of low interest rates, buy-to-let is particularly incentivised because mortgages allow investors to take hugely leveraged loans at low rates. When interest rates are low and house prices appear to be rising, they do so freely and speculatively.

Land the issue

19th century economist Henry George went as far as to attribute the business cycle to land speculation. He argued that private ownership of land is inherently unjust. Indeed, economists going as far back as Adam Smith have noted that a tax on the value of land does not affect economic efficiency, as the supply of land is fixed.

It is important to separate the land and the buildings which stand on it.

If mortgage lending encourages construction, that stimulates the economy — which can bring societal benefits. But if mortgages simply serve to swell land values, that is disadvantageous for everyone but landowners.

According to ONS figures the total value of land underlying dwellings in the UK rose 86% between 2008 and 2020, from £2.9bn to £5.4bn. In the same period the average UK house price rose from £161,000 to £248,000, a 54% increase.

While the number of dwellings also increased by around 10% during that period, the evidence still suggests it is residential land prices — rather than house prices — that are causing the housing affordability crisis.

If a borrower can overcome all the challenges of even qualifying for a mortgage, then they still have to take on potentially ruinous interest rate risk.

When interest rates rise during the (normally) relatively short fixed rate teaser period, mortgage borrowers can face vast increases in cost. If that is coupled with a fall in house prices, borrowers can easily fall into negative equity and be left with no alternative but to pay the elevated floating rate.

As such, social lending may even be negative, if it is not done prudently.

Merely tinkering

To illustrate this, DBRS's note commends Skipton's mortgages because they have a criterion (12 months of rent paid on time) for identifying creditworthy borrowers who would be otherwise excluded. That allows them to lend at roughly the market rate to those borrowers.

The alternative for reaching more borrowers would be to loosen underwriting standards and charge higher interest rates. With a superficial glance that could then be labelled as social, when it ought to be called non-conforming.

Tinkering with exactly who is eligible and for how much then can hardly be seen as truly “social” from a broader perspective, if it perpetuates the existing system.

There are those seeking to remove the interest rate risk from those lucky enough to get a mortgage. A handful of 25 year fixed rate products exist and those may form their own brand of social RMBS.

If they became more widespread, they would bring the benefits of stabilising the housing market and removing the interest rate risk from mortgage holders.

But while land speculators can accrue vast returns with huge amounts of leverage, the boom and bust will continue — as will the affordability challenges.

The existing system is broken. Radical land reform is needed to unleash truly social RMBS.