Earlier this week, we were puzzled as to why on earth Bradford & Bingley sold £4.2bn of unpackaged mortgage loans - at a loss - to Dexia and GE Real Estate.
Maybe HBOS has the answer. According to a report from Reuters on Wednesday, current spread levels make securitsing mortgages an economically painful exercise. Spreads on triple-A prime UK residential mortgage-backed securities have roughly quintupled since June. “We wouldn’t be prepared to pay the prices,” said Ian Stewart, HBOS’s head of securitisation and balance sheet management.
So naturally, HBOS is looking to other sources of funding.
But if the UK’s biggest mortgage bank isn’t prepared to securitise because it’s too expensive, where does that leave its smaller rivals?
Possibly, it leaves them - like B&B - having to sell off great chunks of their mortgage book at a loss to banks in foreign countries. There seems little other reason for B&B’s sale, which realised a “£15-40m” loss. That’s especially odd considering the sold loans have brought B&B £47m in profit since it bought them just a year ago. It jars, therefore, when B&B CEO Steven Crawshaw says the sale was a “natural step in the development of Bradford & Bingley’s strategy.” Huh?
One other option open to mortgage banks might be accessing the covered bond market - a much more conservative funding pool. But as FT Alphaville reports, even that appears to have seized up. Interbank market making for covered bonds has been suspended until Monday. People just don’t want to buy mortgage securities - not even when they’re collateralised against an AAA mortgage pool AND a bank’s balance sheet.
Most UK mortgage lenders securitise two or three series of MBS each year. While some are more dependent on securitisation than others, for all it remains a primary source of wholesale funding. Here’s a simple chart based on data from UBS (in millions), on the UK’s top ten mortgage securitisation:
The point of all this being, that if UK mortgage lenders are saying that they can’t securitise and can’t issue covered bonds, there’s a big problem. It’s not even worth considering the commercial paper market. For Northern Rock, which securitised assets at a furious pace, the MBS freeze spelt complete disaster in a matter of weeks. It became a liquidity issue that broke the bank. While the liquidity issue may not be so pronounced for other lenders with high retail deposits, the fact that funding across the markets is seizing up is going to have an impact. If things don’t ease, mortgage banks will end up paying through the teeth, and losing a packet.
Going to the Bank of England simply isn’t an option - unless it could be managed on the sly. How many mortgage lenders then, we wonder, would be approaching the BoE in the next few months were it not for what happened to the Rock?
