New securities markets look like springing up all around the property business. Last week we discussed the proposal to set up an electronic exchange for trading £1,000 units of commercial property in the form of single property unit trusts. This week, the National Home Loans Corporation is floating the idea of a market in mortgages.
The idea of trading mortgage securities in secure, liquid packages is not new and in fact is already under way in several overseas countries where the home loans industry has developed along different paths to that of the United Kingdom.
But just as last week John Barkshire, the energetic chairman of Mercantile House, let it be known that he was putting his weight behind the property unit exchange, so now we have Richard Lacy, chief executive of National Home Loans, promising to get the new market off the ground.
Speaking at a seminar on mortgages, Mr Lacy said that his corporation would pioneer a new market in tradable mortgage securities and the development of the necessary financial instruments. He could not have been more specific.
The word coined for trading in mortgages across an exchange is not a pleasant one: securitisation. But although the word itself is unattractive, perhaps even worse than privatisation, the market it will create promises to be a highly active one, especially if the volume of new gilt-edged securities continues to fall and the gilt “market makers” of the City are suffering from gross overcapacity, as appears likely.
National Home Loans was set up to exploit the slim margin between wholesale borrowing and retail lending by buying secondhand mortgages from banks, insurance companies, local authorities and even building societies, so that those institutions could free their capital, either for granting further mortgages or for other purposes.
But the next stage in the corporation’s development appears to be selling on the mortgages it has acquired, but in a more sophisticated and liquid form.
Mr Lacy said: “We will be a major producer of mortgage packages ourselves and will sell mortgage blocks to banks and others who wish to invest in them. In all cases, we will offer the administrative services necessary to keep the mortgage intact as a good security throughout its life.”
The corporation would be taking a leaf from the book of those who sold it mortgages, selling off as much of its portfolio as it needs to free its own capital. “Securitisation would be a rapid and easy way of getting assets off balance sheet and generating funds for new mortgages.”
The most simple way to securitise a diverse range of mortgage rates with differing interest rate variation provisions would be to standardise the form and to link the rate to an acceptable indicator.
Mr Lacy reckons that the way to securitisation was probably through a link to LIBOR, the London Inter-Bank Offered Rate. “If the rate were directly linked to LIBOR, the lender’s responsibility to change the rate would be eliminated, which would remove the major objection to securitisation. The lender’s judgment would be replaced by the objective, universally known, international money market rate.
“The new security would thus be something between a share and a gilt. It wouldn’t have the security of Government backing, but it would have the security of real property and would probably, as a general rule, yield more than gilts.”
He said the most exciting thing about securitisation is the trading prospects. Those able to predict LIBOR fluctuations would be active buyers and sellers of the mortgage certificates, and “I would hazard a guess that some sellers of certificates would venture into fixed-rate mortgages in the American manner, which would add even more spice to the brew”.
Apart from the active traders, however, there would be a steady demand from long-term investors who would be attracted to the strong security and guaranteed a high yield of mortgage lending without the administrative problems of going into the mortgage business.
