Housing affordability for first-time buyers is a matter of great public debate in the UK with aspiring home owners locked out of the market because of the size of the deposit they need to raise in order to borrow a mortgage. Securitization can help lenders reach customers stuck in this bind.
There is a gap in the mortgage market, where borrowers who make rental payments cannot get a mortgage on which the payments would be similar because they do not have enough savings for a deposit.
One solution to this problem would be a return to high loan-to-value (LTV) mortgages where the ratio is between 90% and 100%.
High LTV mortgages are riskier for banks because the borrower holds less equity, so banks must hold more capital against these loans.
These products are having a revival, their greatest share of mortgage originations since 2008.
Lenders like Gable Group announced plans to offer zero deposit loans in August, and Melton Building Society started lending zero deposit loans in January, but it is less common for High Street banks to offer such products.
Securitization can bring banks into this revival by providing a solution for the high capital charges they would face. Banks can issue a significant risk transfer (SRT) deal where capital is freed up by transferring the risk of a portfolio of high LTV mortgages to an investor, while the assets are kept on the bank’s balance sheet.
A bank could also launch a deconsolidation residential mortgage-backed securitization where it structures the deal, retains the senior notes and sells the more capital-intensive mezzanine notes to investors, taking the assets off its balance sheet and freeing up capital.
High LTV lending was more common before the 2008 global financial crisis (GFC), with somelenders offering mortgages up to 125% LTV.
Banks withdrew from this type of lending after the global financial crisis due to stricter underwriting and bank capital charges.
While these pre-GFC mortgages may have left a bad taste in some investors’ mouths, modern high-LTV mortgages are less risky than the old ones, with stronger affordability checks, rental payment history requirements and a guarantor often required. This should give investors greater comfort in gaining exposure to these assets.
Deploying securitization to unstick parts of the real economy is exactly what policymakers across Europe have been looking to do for years. The industry in the UK now has a chance to contribute to freeing one of the country's most visible economic blockages.