Wednesday, August 20, 2008

Mortgage Securities Stir in U.K.

(WSJ) Alliance & Leicester PLC, a British bank, sold about £400 million ($747 million) of high-quality bonds backed by home loans this week, in a rare sign of life in the market for mortgage securities.

However, bankers say the U.K. lender's Monday sale isn't yet a sign of growing momentum in the mortgage-finance market, which has been a ghost town since the credit crunch last summer.

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Most of the deal was bought by a single Continental European bank that has purchased British mortgage bonds in the past, said Jeff Stolz, a managing director at Goldman Sachs Group Inc. in London, which sold the deal along with Royal Bank of Scotland Group PLC. He declined to identify the bank.

"It's a small step in the right direction to get the market going again," Mr. Stolz said. "Does that mean we're back to where we were 18 months ago? Absolutely not."

The deal comes amid a continuing drop in U.K. house prices and a plan by the Bank of England aimed at shoring up the U.K. economy. That plan currently allows banks to temporarily swap high-quality mortgage-backed securities for U.K. treasury bills.

Mr. Stolz said investors expressed interest in buying a high-quality bond from Alliance & Leicester in June. He said the bond's purchasers planned to hold onto it, and not swap it for central-bank funding.

Alliance & Leicester is considered to be in stronger shape than some peers. It agreed in July to be acquired by one of Europe's biggest banks, Spain's Banco Santander SA. While Alliance & Leicester's shares are down 51% this year at 319.50 pence each, they have remained above the 219.25 pence they hit before the July 14 takeover announcement.

Alliance & Leicester's deal is one of a tiny number of mortgage securitizations that have been sold to investors this year. In May, HBOS PLC, the U.K.'s biggest home lender, sold about $1 billion of highly rated bonds. And some sales have been conducted privately.

Similar investor-driven mortgage securitizations could be on the way, bankers said.

But banks have all but stopped selling mortgage-backed securities and investors have all but stopped buying them in the past year. The U.S. housing crisis has prompted defaults, and the securities have led to billions of dollars in losses for banks globally.

Alliance & Leicester has been more conservative in its mortgage lending than some of its midsize peers like Bradford & Bingley PLC, which specializes in loans to those who rent out properties.

A spokesman for Alliance & Leicester said Monday's bond sale reflected the high quality of the lender's mortgage assets. The entire mortgage securitization was rated triple-A, the highest credit rating.

Alliance & Leicester's deal consisted of two sections: a $150 million batch of securities giving investors a yield of 0.60 percentage point above the London interbank offered rate, which banks charge each other for loans; and a separate €400 million package of bonds that offered 0.90 percentage point over the equivalent European bank lending rate.

Before the credit crunch, a similar deal would probably have needed about a tenth of the yield to draw investors, Goldman Sachs's Mr. Stolz said.

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