Article first published in SCI (www.structuredcreditinvestor.com) 1 June 2018.
A thriving European mortgage market is attracting foreign investors seeking to capitalise on the low-risk returns on offer, particularly in the UK and the Netherlands. New firms such as Fortrum (SCI 18 May) are being established, offering innovative products and services to help smooth the path for those venturing into the European structured finance sector.
Simon Collingridge, co-founder of Fortrum, comments: “We are essentially looking to provide a combination of insurance and structured finance techniques to create more efficient securitisations and to help companies make more efficient use of capital.”
Part of this effort involves partnering with Lime Risk to engage in activities where insurance and securitisation cross over. For example, the venture will provide insurance through a rep and warranty on the originator penalty incurred on the SPV, resulting from securitisation.
The firm is also looking to offer mortgage indemnity insurance to help with capital protection on mortgages. Collingridge suggests this is particularly needed in the Netherlands and is something that can help protect investors in securitisations backed by property.
Although the Dutch government’s NHG insurance is useful for certain properties, it falls short when it comes to more expensive ones. As a result, Fortrum has structured an additional insurance policy to cover a broader range of properties, “which makes sense from a capital perspective”.
In terms of the firm’s client base, it is hoping to attract first-time investors, largely coming into the Dutch and UK mortgage market. These will likely be insurers, pension funds and some banks that want to match long-term assets with liabilities.
The Dutch government has a clear strategy in supporting the country’s mortgage market, as well as aiming to bring down LTV ratios, complemented by a strong political and economic environment. As a result, significant projected growth in the Dutch mortgage market of €600bn-€850bn is expected over the next few years, potentially fuelled by foreign investment.
Collingridge believes that his firm will be able to fill a gap in the market, where investors may need due diligence and local expertise to help them get a foothold – whether this be securitisation, whole loan sales or originate-to-manage strategies (SCI 10 April). “We can assess a mortgage portfolio for an investor and review it on an ongoing basis, particularly if they are securitising it. An investor will need a third party to oversee a transaction,” he says.
He continues: “Additionally, from a compliance point of view, ongoing surveillance can help to ensure investors have a fully compliant book, which is important under IFRS 9. We are especially able to help investors with origination or underwriting expertise at a local level.”
The non-performing loan sector is also a target area for Fortrum, whether in the UK, Spain, Italy or other jurisdictions with high NPL exposures – particularly in terms of “plugging the data gap.” Collingridge says that one of the most shocking things in Italy, for example, is “the absolute absence of data in many instances” – which makes it particularly difficult to bring a securitisation. He hopes that his firm will be able to help, particularly in “the area of data collation and helping banks to judge which loans to keep or dispose of.”
He suggests that the ECB’s attempts to push ahead with resolving the NPL data consistency issues should be applauded. Such issues need to be resolved, especially if banks are to comply with IFRS 9 and, to do this, they need a clear recovery strategy.
Collingridge adds that Fortrum will step in where banks need guidance on strategy, by helping to weigh up which portfolios to keep and which to sell, and also help with surveillance and underwriting.
More broadly, he says securitisation is a suitable tool for managing risk and raising capital and it has lost a degree of stigma in Europe, boosting its prospects. Work still needs to be done, however, in terms of aligning it with other asset classes in Europe.
Collingridge concludes: “Regulations are still not completely set, however, and [securitisation] is still treated punitively compared to corporate bonds, which receive preferable capital treatment. That may change in time. But otherwise it is still a more optimistic outlook than previously, especially with stabilising factors like STS coming into place.”