The securitsation of residential-backed securities has long been dominated by the banks - rather than sold into the capital markets - but this is about to change due to new data-driven technologies, smart contracts and blockchain.
The securitisation of mortgages by marketplace lenders could well become commonplace in Australia as banks come under regulatory capital pressure and competitive pressures, causing the loss of market share in the $1.6 trillion home loan market.
Australian Mortgage Marketplace (AMM) has built a ‘direct to market’ mortgage securitisation platform that it says will deliver a better deal for both borrowers and investors in mortgage-backed securities.
“Such platforms will make the services that banks, ratings agencies and trustees provide in a securitisation obsolete,” claimed Graham Andersen, a founder of AMM, who added that this market hasn’t seen a major new entrant for more than 15 years - despite mortgage balances having tripled in growth over that period.
Given the lack of mortgage data in Australia, traditional RMBS investors have relied heavily on credit ratings agencies and the tranching process for risk analysis, at the expense of yield.
“The platform will add a new mortgage security to traditional mortgage investment products, cuts costs and mitigate risk, all of which will result in lower rates for borrowers and higher yields to investors," said Andersen.
A digitised origination and funding platform will let capital markets invest in a diversified pool of loans secured by residential property, just like a bank. And the marketplace lender will distribute product through the wholesale broker channels.
As Andersen sees it, traditional securitisation has inherent inefficiencies because of the way it works - it’s old tech and inefficient and is costly both in terms of management and the cost of funds. Payment priorities of the tranched RMBS are an issue since they favor paying down the low risk, low cost AAA tranches first and so the cost of funds goes up over time.
“Typically you pay down the least expensive debt before you pay down the other tranches - that’s what the ratings firms require.”
Back-office operations can now be digitised using smart contracts and blockchain technology, automating the trustee and trust manager roles' many manual processes. Put simply, blockchain technology now allows for the free and accurate provision of data to understand risk and value and smart contracts that can validate and automate the whole payment process.
According to Andersen, marketplace lending will not replace traditional securitisation overnight, but offers an attractive alternative. AMM will launch next year and principally target the country’s super funds for money.
It is Andersen’s belief that superfunds would love to invest more directly in residential mortgages - since it is a way of them getting a higher yield for taking slightly more risk that they can understand in a secure environment.
This view jibes with that of Robert Camilleri, investment manager at Realm Investments. According to Camilleri, there is an appetite although funds will need to be educated on what will be perceived as a complex product
Andersen’s response is the technology is now available that can reduce complexity and make the process transparent, reliable and trustworthy for the funds, making the education process straightforward.
In the US, marketplace loan securitisation has taken off, albeit from a low base. And according to Andersen, products tend to be car loans, student loans and personal loans. The UK sticks pretty much to traditional securitisation although, in the Netherlands, institutions are effectively investing directly in residential mortgages through trusts.
“Marketplace loan asset-backed securities will rise due to the extra control and transparency that online lending platforms can exert over the securitisation process,” he added.