Study: Securitisation good for the mortgage market

Securitised mortgages are safer than variable rate mortgages provided they are tightly regulated, research from Nottingham Trent University claims.

Securitised mortgages are safer than variable rate mortgages provided they are tightly regulated, research from Nottingham Trent University claims.

Securitisation, where investors buy pools of debt as secured assets, played a major role in the global financial crisis due to the collapse of low quality mortgage-backed securities backed by sub-prime mortgages in the USA.

But Michael White, co-author of the report, said: “It's clear from this research that securitisation – providing it is tightly regulated – has the potential to provide borrowers with increased access to lower risk mortgages.”

The research found that 78% of mortgages sold as securities over a 9-year period were held in longer-term fixed rate contracts.

Co-author Alla Koblyakova said: “This is an important finding as it shows that securitisation not only increases liquidity in the market but has the potential to shift consumer mortgage choices toward long-term fixed rate mortgage debt.

“In a market like the United Kingdom’s, where around 80% of residential mortgage debt is held in higher risk variable rate or short-term fixed rate contracts, this is a very welcome finding.

“A high level of variable debt is seen as a source of economic instability. Policymakers may wish, therefore, to consider the potentially beneficial role that securitisation can play in helping balance the UK mortgage market.”

The study said variable rate and short-term fixed rate mortgages are in fact more risky for borrowers as they leave them more vulnerable to financial shocks such as interest rate increases. In contrast longer-term fixed rate deals protect borrowers from such increases but leave lenders more exposed to risks.

It was also found that variable rate mortgages are more profitable for lenders than long-term fixed rate mortgages by as much as 1.6%.

White added: “The UK mortgage market may be dominated by variable rate and short-term fixed rate mortgages because lenders make more money from these products, not because they are the consumer’s first choice of mortgage.”

The study was published by SAGE Publishing in research journal Urban Studies.