This week the FCA and PRA published proposals to make securitization rules less burdensome.
Here, Richard Pinch, senior risk director at Broadstone Financial Services Consultancy, explains why this could be good news for the mortgage market…
The new consultation covers areas where greater proportionality, flexibility and clarity could strengthen the UK securitization system. The proposals mainly focus on transparency obligations for originators and on simplifying due diligence requirements for investors, with the PRA aiming to reduce prescriptive requirements and update the capital treatment for loans under the Mortgage Guarantee Scheme.
The package of reforms ultimately aims to make securitization rules less rigid and burdensome for UK mortgage lenders, along with other PRA authorized firms, to reduce compliance costs, increase efficiency and drive greater investor interest in mortgage-backed securities (MBS). For mortgage lenders, this is likely to mean less detailed reporting and fewer checks on securitized mortgage pools, as well as fewer prescriptive ‘tick boxes’ on how due diligence should be conducted.
The proposals to relax due diligence and disclosure requirements could indirectly impact securitized mortgages, with the PRA suggesting a reduction in the number of prescribed checks investors must undertake when purchasing MBS. For mortgage providers, this could reduce the administrative burden and possibly also reduce the costs associated with securitizing loan portfolios. This could in turn encourage more investment in MBS and make the market more accessible and competitive.
The PRA also proposes a simplified approach to investors’ obligation to verify risk retention, requiring lenders to retain some risk when securitizing loans. Under the current framework, risk retention rules can be complex, but the PRA’s proposals would provide more flexible options for lenders and aim to better align risk retention with the actual risks of the underlying assets. This would allow mortgage lenders to reduce the costs associated with retaining risk while still ensuring investor protection.
Other proposed reforms include adjustments to capital requirements for mortgages backed by government guarantees, such as those under the Mortgage Guarantee Scheme. This could lower the cost of capital for securitized portfolios benefiting from government support, improving returns and increasing liquidity for lenders. This can also make certain mortgage-backed securities more attractive.
Finally, the PRA has proposed easing the regulatory burden for smaller securitisations, including single-loan securitisations. This could benefit smaller lenders or those issuing smaller mortgage-backed deals by reducing reporting requirements, lowering barriers to entry and improving access to the securitization market.