Banks are carried away by securitization

The mortgage securitization market this year showed the same volumes in about six months as in the whole of 2021. At the same time, repo transactions with mortgage bonds set a record and exceeded last year’s figure four times. In 2023, according to market participants, the volume of securitization may grow due to securities with preferential mortgages as the underlying asset. However, experts warn about the risks of the tool, recalling the US mortgage crisis of 2007-2008.

This year’s last placement of DOM.RF mortgage bonds for 49 billion rubles. will take place on December 26th. Thus, the total volume of mortgage-backed securities issued this year will reach 400 billion rubles. The result is close to last year, but the first placement this year took place only in June.

According to Elena Muzykina, director of the Securitization division of DOM.RF, the volume of mortgage bonds used by banks in repo transactions was a record 4.4 trillion rubles this year, which is four times more than in 2021.

“These transactions allow banks to obtain liquidity for further mortgage issuance, but the main volume of mortgage securitization this year was nevertheless carried out in order to unload the balance sheet,” Ms. Muzykina explains. “Banks replace loans with mortgage-backed securities in the balance sheet, offload reserves and release capital” .

Pavel Kashitsyn, Director of the Structured Finance Ratings Department at Expert RA, notes that, according to DOM.RF, in the third quarter of 2022, the volume of repo transactions with DOM.RF securities increased 15 times compared to the second quarter and reached 1.85 trillion rubles . Almost the entire volume of transactions is an exchange repo with the Federal Treasury (1.74 trillion rubles). “This mechanism significantly improves the conditions for attracting short-term liquidity for investors in the DOM.RF ICB, including due to the lower cost compared to interbank loans, so, in addition to unloading capital, the originators can improve the balance sheet structure by increasing the liquidity of assets,” explains Mr Kashitsyn.

Elena Muzykina adds that banks have begun issuing the first test mortgages for “primary” companies with equity participation agreements, which was not the case in previous years. It can be assumed that next year and exactly in 2024 this will become a factor that will affect mortgage securitization volumes. VTB told Kommersant that they are considering an increase in securitization next year and not only mortgage.

At the same time, regulatory support is required to improve the efficiency of using securitization as a market instrument for attracting extrabudgetary sources of financing for economic growth, market participants say.

“Banks, rating agencies, professional associations have repeatedly sent their proposals to create favorable conditions for the development of the market, and recently the Central Bank and the government have taken a number of important incentive measures in this direction, which mainly relate to mortgage-backed securities guaranteed by DOM.RF,”— explained in VTB. The bank also noted that there is an active dialogue with the regulator regarding “classic” securitization: multi-tranche, rated, including transactions with non-mortgage assets.

However, independent financial expert Nadezhda Gromova draws attention to the potential risks that mortgage securitization may entail. “We should not forget what the turmoil in the US financial market was like in 2007-2008, when overvalued collateral backing mortgages began to fall sharply in price,” emphasizes Ms. Gromova. These risks, according to her, arise not from how many bonds are issued in circulation, but from whether borrowers can continue to fulfill their obligations, what is the ratio of mortgage debt to the monetary income of the population.

“By 2007, the situation in the United States was as follows: banks became very dependent on short-term liquidity, that is, they provided loans to companies, people, businesses for a long time, but borrowed short-term funds. How did you occupy? They took mortgage-backed bonds as highly liquid and then gave them in repo on the market to their regular partners,” explains Nadezhda Gromova. This market developed on a huge scale, she adds, and at some point, the sponsor banks stopped giving funds in repo again. In dealing with such assets, she said, “one should always remember that, no matter what quality they may be at the time of issue, there is always a risk of deterioration in the quality of loan portfolios due to the uncertainty faced by the Russian economy.”

Maxim Buylov