A €25bn Dutch asset manager is seeking regulatory approval to sell popular home loan investments in Europe to UK pension funds, in a bid to win over skeptical institutional investors still scarred by the role played by the asset in the financial crisis of 2008.
DMFCO – an investor managing more than €25 billion in mortgages in the Netherlands – is in talks with the Financial Conduct Authority to gain permission to lend and service home loans in the UK.
He also met with potential funders, including large pension plans and insurers, to persuade them to dive into a market still associated with the global financial crisis 15 years ago.
Britain’s pension funds, among the largest in Europe, have largely steered clear of mortgage-linked investments since the 2008 crisis, when securities including poor-quality mortgages were bundled into a bond and sold to investors.
DMFCO argues that its model is different from residential mortgage-backed securities and structured products that offer income based on payments from many individual mortgages. Instead, investors put their money directly into a mortgage pool and get a higher return, but bear all the risk. DMFCO said it targets “premium” borrowers with good credit histories.
“It’s a pretty simple model, institutional investors, including pension funds, with very long-term bonds and we basically connect them with homeowners who also have a long-term need to fund their residential property,” said Rogier van der Hijden, Managing Director of DMFCO.
The move comes as the traditional lending market is rapidly reshaping. New types of lenders, backed by institutional investors such as pension funds and insurance companies, are beginning to compete with the banks that have traditionally dominated the market.
Investment advisers say tighter regulation since the 2008 crisis, including stricter credit checks on borrowers, has addressed many concerns about investing in the sector.
Since its inception in 2014, DMFCO has issued approximately 100,000 Dutch mortgages, with 32 investors including insurance companies and large pension funds backing the loans with their investments, averaging around 800 million. euros each. He is aiming to complete his first deal in 12 months in the UK, if he wins regulatory approval.
“There is a stigma on residential mortgage investments due to the [global financial crisis] but that is now largely unwarranted,” said Simeon Willis, chief investment officer at XPS Pensions, a retirement advisory firm.
But Gregg Disdale, head of alternative credit at WTW, formerly Willis Towers Watson, said many pension fund administrators might still need to get “comfortable” before diving straight into home loans, saying particularly around credit risk checks. In particular, direct home loans are less liquid than an RMBS, a traded security.
“Institutional investment in residential mortgages in the Netherlands has been attractive to pension funds because it generally tends to be much older than the typical UK mortgage, like 10-15 years, which offers an asset more stable to investors,” Disdale said.
“In the UK, as the market has tended not to offer long-term fixed rate products, it doesn’t necessarily have the long-term certainty of cash flow that you get in the Dutch mortgage space” , did he declare.
Moreover, pension funds are increasingly aware of being targeted by new products.
Mark Fawcett, chief investment officer at Nest, Britain’s £22billion workplace pension scheme, said he was aware residential mortgage-backed securities were being offered to large pension schemes. “We said we didn’t want any of this because we couldn’t be sure of the underlying risk,” Fawcett said. “We are very selective.