Securitisation can be good for mortgage borrowers, study shows

Securitisation – the much-maligned practice of investors buying pools of debt as secured assets – enables mortgage lenders to offer an increased number of lower risk, long-term fixed-rate mortgages, research by Nottingham Trent University shows.

Policymakers may wish to consider the potentially beneficial role that securitisation can play in helping balance the UK market.
Dr Alla Koblyakova

Securitisation – the much-maligned practice of investors buying pools of debt as secured assets – enables mortgage lenders to offer an increased number of lower-risk, long-term fixed-rate mortgages, research by Nottingham Trent University shows.

A study of long-term market trends by Dr Alla Koblyakova and Professor Michael White, of the University's Real Estate Economics and Investment Research Group, shows that 78% of mortgages sold as securities over a nine-year period were held in longer-term fixed-rate contracts.

"This is an important finding as it shows that securitisation not only increases liquidity in the market but has the potential to shift consumer mortgage choices toward long-term fixed-rate mortgage debt," said Dr Koblyakova, of the School of Architecture, Design and the Built Environment.

"In a market like the United Kingdom's, where around 80% of residential mortgage debt is held in higher-risk variable-rate or short-term fixed-rate contracts, this is a very welcome finding.

"A high level of variable debt is seen as a source of economic instability. Policymakers may wish, therefore, to consider the potentially beneficial role that securitisation can play in helping balance the UK mortgage market."

Variable-rate and short-term fixed-rate mortgages are more risky for borrowers as they leave them more vulnerable to financial shocks, such as interest rate increases. By contrast, longer-term fixed-rate deals protect borrowers from such increases, but leave lenders more exposed to these risks.

Dr Koblyakova believes lenders may be more inclined to offer longer-term fixed-rate mortgages to borrowers when these mortgages are sold on as securities because this reduces the lenders' exposure to risk.

The study – which was published recently by SAGE Publishing in research journal Urban Studies – also found that variable-rate mortgages were more profitable for lenders than long-term fixed–rate mortgages by as much as 1.6%.

For every 1% of profit a mortgage lender makes from a variable-rate mortgage, the market share of variable-rate mortgages increases by 18%. This is despite the data also suggesting that consumers prefer to take out longer-term fixed-rate products.

Dr Koblyakova added: "According to this data, larger profit margins for variable-rate mortgage products positively influences demand. These findings are very important, and should stand as a call for action from policymakers, as they show that UK households may be faced with greater payment shocks because of the strategies of lenders."

Professor White said: "Regulation of financial products such as mortgage-backed securities is regarded as a key issue in the global financial crisis. Securitised products are argued to have had credit ratings that suggested they were lower risk than was actually the case.

"But it's clear from this research that securitisation – providing it is tightly regulated – has the potential to provide borrowers with increased access to lower-risk mortgages.

"What's also clear is that the UK mortgage market may be dominated by variable-rate and short-term fixed-rate mortgages because lenders make more money from these products, not because they are the consumer's first choice of mortgage."

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    The study is based on data from the Bank of England Data Archive, Nationwide House Price Index, European Mortgage Federation publications and the Council of Mortgage Lenders databases. Data was taken over a nine year period – from 2001 to 2009 – in order to establish long-term behaviours through diverse national economic situations, including a housing market boom and bust

    The Queen's Anniversary Prize for Higher and Further Education was awarded to Nottingham Trent University in November 2015. It is the highest national honour for a UK university and recognises the institution's world-class research. Pioneering projects to improve weapons and explosives detection in luggage, enable safer production of powdered infant formula, and combat food fraud, led to the prestigious award.

Securitisation can be good for mortgage borrowers, study shows

Published on 19 February 2016
  • Category: Press office; Research; School of Architecture, Design and the Built Environment

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