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Securitisation Market: Non-bank housing market

Picture of Gordon Kerr | Head of Research, GLobal Structured Finance at DBRS Morningstar

Gordon Kerr | Head of Research, GLobal Structured Finance at DBRS Morningstar

Gordon Kerr, Head of Research, Global Structured Finance at DBRS Morningstar, is one of the speakers at the Securitisation Event 2021. He is a member of a 4-person panel which will be discussing the effects of the increase in non-bank securitisation deals on the housing market.


What role does DBRS Morningstar play in securitisation?

“We are a credit rating agency. This means that we evaluate the credit risk associated with securitisation transactions. That involves evaluating the pool quality, as well as checking and making sure that — in this case — the non-bank lender has good origination practices and is able to accurately assess the risk associated with its borrowers, and their ability to service those loans going forward.”


What are some effects of non-bank securitisation on the broader housing market?

“Non-banks becoming involved in the market as lenders is a favourable development. They can offer an alternative for borrowers. They also keep the market competitive in terms of lending. The fact that they can finance themselves through securitisation allows them to recycle capital into further lending. This is a positive way to expand the offering for borrowers.”


Does this development constitute an increased risk in your view?

“It depends on who the non-bank parties, such as mortgage brokers, are lending to. If they are lending to borrowers who may have lower incomes or more difficult circumstances, then they may be taking on a greater level of risk. But when it comes to securitisation, it is up to the securitisation investors to take into account any increased level of risk which may exist when compared to a traditional prime borrower. As a rating agency, we will reflect any increased risk appropriately via our transaction ratings.”


Do non-bank players impact the buy-to-let market?

“Non-bank lenders are playing an active role in the buy-to-let space, particularly in the Netherlands. They offer a new source of lending in the housing market to landlords. They enable buy-to-let investors to actively participate in the rental market and find funding.”


Dutch buy-to-let market: an opportunity

How do you see non-bank participation in the housing market evolving in the near future?

“The buy-to-let market has been growing in the Netherlands. The UK market, given its participation in the securitisation market and its well-developed buy-to-let lending market is an interesting comparison. In the UK this market is a little more mature than it is in the Netherlands in terms of the level of involvement by non-bank parties. In the UK, non-banks play a larger role in the buy-to-let market and they actively make use of securitisation in order to help fund themselves through that lending process.”


Could this UK model be interesting for the Dutch market, and perhaps other markets?

“Yes, absolutely. One caveat would be that there must be a strong legal framework around that buy-to-let market. This exists in the UK and is reasonably strong in the Netherlands as well. This is definitely a growth market. As the Dutch population grows, and the demand for private rental over social housing increases, the development of the buy-to-let market in the Netherlands is likely to continue to grow.”


A new tool to quantify ESG Credit Risk

What innovations is DBRS Morningstar bringing to the securitisation market?

“In February 2021, we launched a new global methodology for analysing and assessing Environmental, Social and Governance Risk Factors and applying them in our assessment of credit risks. This new tool can be applied widely: to governments, financial institutions and corporations for example, but also for structured finance. In terms of securitisation, this new ESG rating system will be applied to the collateral securitised in the transactions, the transaction counterparties and to the transaction structure itself.”


How do you assess these factors in an impartial way?

“We have identified 17 separate ESG factors which play a role in the evaluation of companies, governments and securitisations in a global context. We take each of those factors and apply them to see if they affect risk: either positively or negatively. For example, if a corporation has a headquarters building which is built according to extremely high environmental standards, we would assess whether or not this actually has an impact on the valuation of the building. And if that impact, versus a “non-green” building, is enough for it to have a positive credit impact on our rating of the transaction. We then disclose that information as part of our rating documentation.


Do ESG factors always have a credit impact?

Not necessarily. It is quite possible that certain ESG factors have no credit impact. But this brand-new system gives us a formal methodology in order to analyse these important factors and ensure that investors are kept informed on when they do play a role in the credit decisions.


What is the main benefit of this system?

This method offers a greater degree of transparency into how ESG factors play a role in a credit investment. Either positively, negatively or neutrally: we do not have an opinion on these factors as such, we look at the potential credit impact through impartial analysis.

The post-pandemic environment

Has the securitisation market been affected by the pandemic in your view?

“There have been many subtle changes. This, of course, has a lot to do with not being able to travel. But in terms of the overall market, the pandemic has significantly impacted securitisation due to the reaction of central banks to it, and the resulting availability of liquidity, which was slowly changing before the pandemic hit. Prior to the pandemic, the securitisation market was moving back to an investor dominated market, whereas it has since migrated back towards a largely retained market.”


Are you expecting any surprises in the securitisation market in 2021?

“I don’t expect any major surprises. One thing which we are monitoring is the potential impact of the withdrawal of government financial support measures, and whether or not that will impact on borrowers. As these furlough schemes and other support measures to keep people employed are slowly withdrawn, will it lead to a dramatic increase in unemployment, or not?”


How might that effect the securitisation market?

“If that performance starts to deteriorate, then there is a risk of downgrades, and pricing associated with transactions may increase, and that could potentially impact issuance. However, we remain relatively comfortable with these risks for most sectors and their ability to weather the circumstances from a credit perspective.”


What is significant of the Securitisation Event this year, in your view?

“As we come out of lock-down and head towards the post-pandemic environment, it’s especially important for all of us involved in the securitisation industry to make sure we are aware of what’s happening in the markets. This particular event is very useful in terms of staying on top of the activities in the Dutch market and the wider international securitisation trends going forward. I’m very much looking forward to the online event: it’s the next best thing to meeting everyone in person!”


For more information or tickets, visit the eventpage of the Securitisation Event 2022.


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