Choices between mortgage products in the UK are often limited to whether a borrower wants a fixed rate for two or five years. The dearth of options highlights a lack of innovation in a heavily regulated and bank-dominated market.
Regulators now appear to want more innovation, so new players with new ideas targeting particular niches will need to emerge. Securitization will be crucial to making that happen.
A perfect example, just this week, is Selina Finance. The firm offers home equity lines of credit (Helocs) — a popular product in the US market but rarely seen in the UK. It is securitizing Helocs along with some second lien mortgages for the first time in the public market, via Waterfall Asset Management.
For this deal, Odyssey Funding, they are only part of the pool, but the trade could prove UK RMBS investors are willing to fund Helocs.
In addition, the fact that a sophisticated sponsor like Waterfall would choose public securitization to finance them speaks to the RMBS market's ability to cater to niche and innovative products.
Securitization has long provided a useful home for seasoned mortgage loans, as well as awkward portfolios no one quite knows how to fund.
Last year, AB CarVal included a £15m portfolio of long term fixes into a UK buy-to-let deal from Quantum Mortgages. Irish lender Dilosk funded an unusual portfolio of legacy mortgages that could be flexibly drawn up to an amortising limit, albeit with slightly imperfect execution.
Such pools may seem like novel curiosities, but in the coming years, the fact that RMBS investors can handle such loans should make the market an excellent funding option for disruptors and innovators hoping to widen borrowers’ options beyond the old dilemma of two years or five.