Mortgage Bonds Fall in U.K. Amid Indigestion on Home-Price Drop
Securities that banks use to spread the risk of U.K. mortgage lending are falling as a flood of new issues and slumping house prices curb appetite for the debt.
Mortgage-backed bond yields rose to 140 basis points more than the London interbank offered rate, the highest in two months and up from 135 a month ago, according to JPMorgan Chase & Co. The spread on top-rated mortgage-backed securities pooling U.K. home loans was 425 basis points in January 2009.
Spreads widened as sales of asset-backed bonds led by U.K. mortgage lenders jumped to $18.4 billion in September, the busiest month since the second half of 2007, JPMorgan data shows. Britain’s mortgage-backed bond market, Europe’s largest, virtually shut two years ago after notes linked to U.S. subprime debt slumped, causing investors to shun hard-to-value assets. Sales restarted in September 2009.
“The market is currently suffering a bit of new-issue indigestion,” said Stefano Loreti, portfolio manager at Cairn Capital Ltd., where he helps manage about $30 billion of assets.
Bonds sold last month by Royal Bank of Scotland Group Plc’s Arran Mortgage Funding program and Banco Santander SA’s Fosse Master Issuer Plc are being quoted at below face value in secondary market trading, according to three people familiar with how the securities trade.
RBS’s 655 million-pound ($1.06 billion) issue of Arran 2010-1 A3 bonds was quoted at a bid price of as much as 10 basis points below face value yesterday, said the people, who declined to be identified because the information is private. The notes were priced at par to yield 150 basis points over the London interbank offered rate. A basis point is 0.01 percentage point.
Santander’s Fosse 2010-4’s 675 million-pound issue of A1 bonds sold on Sept. 2 was quoted at bid price of about 99.91 percent, the people said. The securities were issued at 100 percent of face value, yielding a spread of 140 basis points.
“Arran performed well post launch, and even in the recent softer market remains bid at reoffer or within a fraction of a basis point of reoffer levels across all tranches,” Harman Dhami, a syndicate manager at RBS, said in an e-mail. Santander U.K. spokesman Anthony Frost declined to comment.
Britain’s housing recovery may be faltering as the biggest spending squeeze since World War II deters buyers and banks restrict access to credit.
The number of U.K. real-estate agents saying home prices fell exceeded those reporting gains by 36 percentage points in September, down from minus 32 points in August, the Royal Institution of Chartered Surveyors said today.
The report follows data from U.K. mortgage lender Halifax showing house prices plunged 3.6 percent in September, the biggest drop since at least 1983. Property derivatives show the Halifax index may fall another 7.5 percent, Bank of America Corp. analyst Caspar Cook wrote in a report published yesterday.
“The record drop in the Halifax housing index could dent the investor confidence needed to support another wave of supply at the current prices,” Loreti at Cairn Capital said.
Banks create mortgage-backed securities by pooling home loans and selling them to investors as notes. The bonds typically allow lenders to raise capital more cheaply than by issuing unsecured debt.
The pipeline of new U.K. mortgage-backed bonds is building with Lloyds Banking Group marketing securities that include the first yen-denominated notes. Investec Plc, the Johannesburg- based private bank, is selling the first notes backed by U.K. non-conforming mortgages since 2007. Banks have created even more securities that they keep to use as collateral for loans from central banks.
Banks had slashed their holdings of asset-backed securities in 2007 when prices plunged. The European Central Bank got stung for 10.3 billion euros in 2008 when five firms, including a unit of Lehman Brothers Holdings Inc., defaulted on loans where asset-backed securities were pledged as collateral.
“Without a larger investor base it’s difficult for the market to continue to absorb large new issues unless there is an attractive premium,” said Loreti, who is helping Cairn invest about $250 million of new cash in European securitizations.
RBS, the U.K.’s largest nationalized lender, issued 4.6 billion pounds of bonds backed by prime U.K. mortgages on Sept. 22 in its first public sale of the debt since 2007, Bloomberg data show. Santander U.K. sold $1.9 billion of similar bonds Sept. 2.
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net
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