personal finance

A new kind of mortgage lending


A few years ago, something unusual started happening in the Netherlands. At a time when yields were so low that several European countries were being paid to borrow on the bond market, pension funds began to move into mortgage lending.

The idea was that such funds, which hold on to money for decades before redistributing it to savers when they retire, are more naturally suited to holding long-term mortgages than banks, which tend to fund themselves with short-term deposits.

While the pension industry had dabbled in Dutch mortgages before, they had more frequently bought mortgage-backed securities, a market which came under regulatory pressure after the financial crisis.

By 2016, nonbank mortgage activity, backed by pension money, made up around 20 per cent of new lending in the country. In some cases, specific pension funds were lending to their own savers (a literal way to invest in yourself).

This trend, one of many examples of nonbank lending in the aftermath of the crisis, also cropped up in Ireland in 2017, and has now spread further afield. Stabelo, a company in Sweden, has now completed €700m of lending backed by large domestic pension funds. While a company in Australia, Athena Home Loans, has received AUS$500m of applications since launching a few weeks ago, which it plans to either securitise or sell directly to pension funds.

While currently small from a business perspective, the idea alone warrants attention, especially given likely global increases in the volume of pension assets. The two most recent cases — in Australia and Sweden respectively — highlight certain areas of potential change in the financial system. In this post, we’ll focus on the newly launched Australian example.

The Australian system already saw a sharp rise and subsequent fall in non bank lending, funded by securitisation, over recent decades. The difference now is the possibility, as in the Dutch case, of selling the loans to institutional investors. There are some examples of this in the UK, as when BlackRock moved into mortgage lending through Fleet Mortgages, a small buy-to-let lender.

Nathan Walsh, chief executive at Athena Home Loans, points to AUS$2.7tn in the Australian pension system. In Australia, employers are obliged to contribute to superannuation funds on behalf of their employees — the current rate is 9.5 per cent.

Data shows that around half of these assets are held in equities (AUS$1.3tn). Mr Walsh also points out that a significant amount — AUS$226bn — is already held as deposits in the banking system. Within banks, deposits are one kind of funding for mortgage lending, alongside bonds, securitisation, covered bonds and so on.

It’s worth at this stage revisiting the historic basis for retail, rather than corporate, deposits at banks. People used to go in to bank branches to set up current accounts. They could also physically go into bank branches to borrow. The physical bank branch was a marketplace for both savings and borrowing products.

Those marketplaces have become increasingly digital. (It’s no coincidence that part of the mooted Deutsche-Commerzbank tie-up is about reducing the number of bank branches). Athena aims to distribute its mortgages online, “direct” to the customer.

One question that arises is the extent to which mortgages are inherently tied to the banking system via the increasingly redundant practice of branch visits. Other institutions that gather up large pools of capital did not previously have an easy means of distributing that capital. Now, with the internet, they do.

The other question is the relative size of deposits versus pension assets. Mr Walsh expects Australian pension assets to hit AUS$10tn over the next few decades. Once the global picture is considered, the potential rise in pension assets is extreme. In 2017, China had fewer pension assets than Australia, equivalent to just 1.5 per cent of its GDP. If it builds a pension system, those funds are likely to flow to perceived safe assets around the world, including, mortgages.

Australian pension funds already have exposure to property and infrastructure. Exposure via mortgages is a particular kind of risk that brings with it reputational scrutiny (a point which came up in the Netherlands example). This is evident in a recent official report into the Australian banking system, which, among other things, criticised mortgage brokers. Athena’s marketing strategy also relies on a critique of banking practices.

The regulatory environment is not necessarily hostile though — bank share prices jumped on the release of the report. New players are also exposed to reputational risks. Their particular lending practices are also untested, as is the long-term stickiness of the pension commitment.

Finally, it is unclear how willing people are to borrow life-changing sums without speaking to someone. This is an area where change is inevitably gradual, because it relates to ingrained habits.

Athena Home Loans is not completely delinked from the banking sector. It has to date raised AUS$45m in funding from Macquarie and local venture capital firms. There are echoes here of other business models backed by major financial players which aim to capture value from incumbent branch-based models, such Goldman Sachs’ Marcus savings product. Innovation might exist, but it is invariably backed by one of the traditional factions.

Related Links:
BlackRock carves niche in UK mortgages – FT
Non-banks shake up Dutch mortgages – FT
Irish pension funds push into mortgage lending
– FT


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