Virgin Money securitise £2.6bn of Prime mortgage debt

Last post: Nov 22, 2012

Securitisation begins again in the mortgage market.

Debt securitisation is used by many financial service providers to offset the risk involved with large-scale lending. For example, debt securitisation could involve a mortgage lender selling on a pool of mortgage contracts (known as the security) to financial investors as bonds or other forms of security, with the investor receiving the interest on the debt as a return on their investment. This process can be a good option for financial diversification and leveraging, but the complexity that comes with it can lead to increased uncertainty and so increased risk on the investor's behalf, and an underestimation of risk on the issuer's behalf. Given this information, there is no wonder why many believe that debt securitisation caused the recent financial crisis to at least some extent. Securitisation is included under the ominous name 'shadow banking', which despite the crisis hindsight, reached a new value of $67 trillion globally in 2011. As shadow banking increases, debt securitisation is re-emerging, and a recent company who are providing this trend are Virgin Money. This is the second securitisation issue (the securitisation transaction is known as Gosforth) that Virgin has performed since the company took over the flagging Northern Rock in 2011. The first (Gosforth 2012-1) was made in June of this year, with a total pool of assets worth £500m. The second issue, unsurprisingly named Gosforth 2012-2, has completed a new £700m securitisation. The issues are based on a pool of UK prime mortgages, both private and commercial. Are Virgin's Actions a Good Thing? Virgin has stated that the issues are here to support new mortgage lending and other forms of lending. They have also stated that its second securitisation will diversify the source of its funding base, which they have said will again, support the growth and diversity of its lending activities. In taking this aim further, they also announced that they have registered with the Government's Funding for Lending Scheme. This scheme is designed to free up lending by allowing building societies and banks to borrow from the Bank of England, and in return, the Bank takes the mortgages and loans they provide as security. This will hopefully provide the incentives to boost lending, and nurture positive feedback by increasing lending options as the lending activities of a given bank increases. Given the tight lending climate at present, alongside the need for consumers to spend, easement would come as a welcome relief for many, and this move may help to install new confidence at a very crucial stage in the UK's economic recovery. If the new financial regulations instigated since the recent economic collapse are able to offset the previous uncertainty of risk in securities lending, then the consequent increase of UK lending may shine through. It has been a long road since the first domino that was Lehman Brothers, and while securitisation carries a proportion of the blame for the mess we are currently in, it could prove to be a very necessary part of our recovery.