A Dutch asset manager is aiming to sell popular mortgage investments in Europe to UK pension funds, in a bid to win over skeptical institutional investors still scarred by the asset’s role in the 2008 financial crisis.
DMFCO, which manages more than €25 billion in mortgages in the Netherlands, is in talks with the Financial Conduct Authority to gain regulatory permission to make 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,” said Rogier van der Hijden, chief executive of DMFCO.
“We essentially connect institutional investors, including pension funds, who have very long-term obligations, with potential home owners who also have a long-term need to finance their homes.”
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.
Since its inception in 2014, DMFCO has originated around 100,000 Dutch mortgages, with 32 investors, including insurance companies and large pension funds, backing the loans with their investments, which average around €800 million. each. He is aiming to complete his first deal in 12 months in the UK, if he wins regulatory approval.
Investment advisers say tighter regulation since the 2008 crisis, including stricter credit checks on borrowers, has addressed many concerns about investing in the sector.
“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, such as 10 to 15 years, which offers a longer asset 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.