Funding Issues in the UK Mortgage Market

Table of Contents

• DATAMONITOR VIEW
  • CATALYST
  • SUMMARY
• ANALYSIS
  • The Northern Rock crisis has brought the issue of mortgage funding to the fore
    • Mortgage funding via the wholesale markets has become more popular in the UK in recent years
      • Securitization in particular has become much more common because of its benefits to lenders
      • The UK mortgage market has become highly sophisticated because of non-retail funding and securitization
    • Starting the troubles, defaults in the US sub-prime mortgage market led to a disruption of credit markets
    • This, in turn, led to a crisis in liquidity, which Northern Rock suffered from
    • Northern Rock' s funding model, as well as other lenders' , have now come into question
  • Some UK lenders, mainly specialists, are now particularly exposed to liquidity shortages
    • Lenders in the specialist sectors are going to be impacted to a greater degree than diversified banks
      • Difficulties are being played out, particularly in the sub-prime mortgage market
    • All lenders will nonetheless face higher wholesale funding costs and a slower mortgage market
      • Should the wholesale markets continue to be difficult in the long term, many more lenders will suffer
      • Diversified banks may not be exposed on the funding side, but many are on the investment side
  • However, this type of funding will continue being relied upon as it is a strong model
    • Funding by wholesale markets and securitization has worked successfully for many years
      • Loose US lending standards and securitization' s opaque nature is more responsible for the current crisis
    • There is no going back to retail-only funding as a large portion of the mortgage market would disappear
    • The market will be repaired, but safeguards should be put into place so that this situation does not re-occur
• APPENDIX
  • Supplementary data
  • Definitions
    • Bank of England base rate
    • Buy-to-let mortgage
    • Collateralized debt obligations (CDOs)
      • Mortgage-backed securities (MBS)
    • Non-standard
    • RMBS
    • Sub-prime
  • Methodology
  • Further reading
  • Ask the analyst
  • Datamonitor consulting
  • Disclaimer
  • List of Tables
    • Table 1: Major UK banks' wholesale funding as a proportion of total funding (%)
    • Table 2: UK major banks' issuance of RMBS (£bn)
    • Table 3: Northern Rock balance sheet growth and liability structure (£bn)
    • Table 4: Major UK banks' customer funding gap (£bn)
  • List of Figures
    • Figure 1: UK banks have turned increasingly towards wholesale mortgage funding in recent years, 2000-07
    • Figure 2: The UK market for residential mortgage-backed securities has grown substantially in recent years, 1999-2006
    • Figure 3: Northern Rock has been increasingly dependent upon wholesale funding, particularly securitization, June 1998-June 2007
    • Figure 4: Major UK banks and others would face a significant funding shortage were they unable to access funding through securitization and the wholesale markets, 1997-H1 2007