The Times They Are A-Changin’

Tony Ward

December 22, 2015

Tony Ward is chief executive of Clayton Euro Risk

I was particularly interested to read in the national press this week that pension funds are now investing an increasing portion of their money in ‘alternative’ assets such as mortgages. It is reported that  Towers Watson, a consultant advising pension funds on their investments, says that about $7bn of its clients’ money globally is invested in so-called ‘illiquid credit’, ranging from real estate loans and mortgages to infrastructure debt and non-performing loans. Five years ago, this amount was close to zero. “Mortgage origination is an opportunity,” said Christopher Redmond, global head of credit at Towers Watson.

Furthermore, the search for greater yield has pushed asset management companies to turn their attention to mortgage markets.  TwentyFour Asset Management has launched a £250m fund to buy mortgages, which recently purchased a portfolio of mortgages from Coventry Building Society. Twenty Four’s Rob Ford said: “It’s a growing opportunity.”  He suggested that asset management companies could partner with mortgage originators, including new non-bank competitors, to provide returns on loans. ‘Teaming up with an organisation that already originates mortgages and working with them, whether they originate purely for their own balance sheet or others, would not be unusual,’ he explained in an article in the Financial Times on 17 December.

I’ve been speculating about this for a while now, as many of my colleagues on the mortgage circuit will attest. This is significant progress.

The development by large asset management firms of the disintermediated model for funding, which streamlines the funding process, is particularly exciting. Not only is this potentially a more scalable and efficient model, it also lends itself to products like retirement lending in a way that conventional securitisation and annuity funding models cannot.

And not only is the funding process disintermediating, I believe that in 2016 we will see disintermediated lending models also emerge whereby the roles of originator of loans, funder and administrator will be taken on by three separate entities rather than have this all embodied in one entity called a mortgage lender. The advent of Solvency II on 1 January is also shepherding insurers to invest in safer asset classes as the regulator begins to pay more attention to the riskiness of their investments.

Changes are afoot. In my mind, changes for the good.


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