Investment bank and securitisation fears increase

Ramesh Sharma

March 11, 2006

German investment bank WestLB has become the latest firm to enter the mortgage market, hot on the heels of speculation surrounding Lehman Brothers’ backing of Alliance & Leicester’s move into specialist mortgage markets.

This influx of investment banks, according to Mark Sismey-Durrant, chief executive of Heritable Bank, could do both short and long-term damage to the market. He said: “The increasing reliance on securitisation within the market is a warning. If you’re managing a buy-to-let portfolio and you’re selling the loan on, the broker will find it very difficult to manage the relationship with the client. It will be very easy for banks to sell the loans on but clients want choice and they don’t want all of their buy-to-let portfolios locked up in one place.”

Investment banks and securitisation have played a significant role in the UK market for over a decade and lenders such as Mortgages plc, a subsidiary of Merrill Lynch, and SPML, owned by Lehman Brothers, have benefited from their involvement.

However, it is the current wave of banks entering the market which has Sismey-Durrant worried. He believes a market dependent on securitisation is dangerous and that the motives of investment banks for entering the market are not in the best interests of everybody.

“If rates go up in a market dependent on securitisation, it could become an issue and we could see a period similar to the mid-1990s where the price of loans, linked to Bank Base Rate, could go up and up,” Sismey-Durrant added.

“Many of the banks are only interested in putting mortgages on their balance sheets to create money-making opportunities for their investors. They are not interested in the UK mortgage market and just see this as a good low-risk investment which they want under their control.”

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