"We’re now seeing high street banks and building societies reignite their securitisation programmes and tap into the capital markets with renewed vigour "
Delegates at this summer’s Global ABS (asset-backed securities) conference in Barcelona displayed noticeably positive attitudes on the topic of wholesale funding.
General sentiment at the event, which attracted around 5,000 people from across the global wholesale funding and securitisation community, was similar to pre-2022 levels.
Positive sentiment
Much of the debate focused on greater market certainty about the direction of inflation as well as the ability of markets to withstand higher borrowing costs.
For example, compared to other challenging periods, the overall proportion of UK mortgage arrears has remained relatively low. Data from industry body UK Finance suggest mortgage arrears are around 1.1% of total homeowner mortgages and 0.7% of buy-to-let mortgages.
This is despite the challenges posed by the current higher cost of living driven by, for example, geo-political issues.
As a result, investment banks and other investors can plan with more confidence and start rebuilding their books.
How the securitisation market works
The securitisation market prices the return that an institutional investor is happy to take for buying into a securitisation as ‘the spread’.
In the mortgage industry, we call this the margin, as in, for example, the margin above the Bank of England’s base rate.
By contrast, the securitisation world typically refers to the spread as ‘above Sonia’ (Sterling Overnight Index Average), that is, the average interest rate benchmark that banks pay to borrow sterling overnight from financial institutions and other institutional investors.
Evidence of recovery
During the past year, spreads have gradually reduced, or 'tightened', as the market has regained confidence in the environment and by association in the products that non-bank lenders such as Zephyr are able to produce.
This reduction allows lenders to pass on mortgage rate reductions to brokers and their customers. At the same time, retail banks have had to pay more to savings customers through increased rates of interest.
As a result, the gap between retail and wholesale funding is narrower than it has been for months.
Consequently, we’re now seeing high street banks and building societies reignite their securitisation programmes and tap into the capital markets with renewed vigour in order to access a broader range of funding sources not only for new mortgages but also to repay central Bank of England funding previously offered during recent challenging periods.
Market sentiment is notorious for changing quickly. However, the mood amongst the securitisation community certainly seems more positive than it has been for some time.
