The most common asset classes in securitisation are mortgage backed securities, auto loans, credit cards and commercial mortgage backed securities. There are also specialty lending segments for more niche opportunities that are out of the scope of a bank.
Key learning objectives:
- The most popular asset classes by volume
- Special cases and other asset classes
- Other instances of securitisation
What are the Famous Asset Classes?
Securitisation usually relies on residential mortgages. This is by far the biggest and most common asset class. This type is called RMBS, or Residential mortgage backed securities. There are some prime residential mortgages, and therefore prime RMBS. There are non-conforming residential mortgages, where the criteria for underwriting is somehow less stringent on some aspects, such as the need for payslips. There are also the buy-to-let mortgages, which are different given the investor’s nature of the borrower rather than owner occupier.Auto loan and credit cards are the second largest. They are often categorised as ABS or asset backed securities. You can find more one-off transactions, such as unsecured consumer loan securitisations or reverse mortgage securitisation. A third class is the CMBS, or commercial mortgage backed securities. This somehow disappeared during the credit crunch, as it has highlighted some flaws in the way they work, and in particular, the fact that the number of assets in the pool is limited.
What does the Specialty Finance Market consist of?
In the UK, some interesting lenders have emerged. They are non bank lenders. This market has grown from inefficiencies in banking lending models. These niche lenders operate across the credit spectrum from ultra-prime to subprime individuals. Companies in this market can have very specialist knowledge which allows them to lend to individuals or on assets that a large bank is not setup to cater to. The market can be segmented as second charge mortgages, bridging loans, finance, unsecured consumer lending, point of sale finance, auto finance, invoice finance, marketplace lending and alternative SME lenders.
Do they all Securitise?
All those loans can only be made if on the other side someone has money to lend. As with specialty lending, one can see that lenders are not always banks. So where do they take the money from? It can be equity or it can be done using a type of securitisation. In the case of smaller lenders, they will not issue notes on the capital markets that will be bought by institutional investors.Instead, we have seen that funding is found in other creative ways and often starts with HNW individuals lending some money, or making a “start up loan”. Once a company is settled, they can apply for a bilateral loan. It is usually a $40m-80m loan made by a bank, for 3 years. Should the company need more, it can seek a Syndicated loan, which is the same but is made by a pool of banks. Those two are very much relationship focused and banks are very selective. Another way to obtain funding would be to apply for a conduit type of transaction. Some Investment banks have conduits, which are vehicles that issue notes on the ABCP markets. Finally, for amounts in excess of £100m, private placements (or a private securitisation) with an institutional investor can offer a longer term financing and slightly better price. To conclude, there is a wide range of loans being made, to cover for all needs in life. For lenders, finding the cash to deploy is a constant exercise, becoming increasingly complex as the amounts sought rise.