A €25bn Dutch asset manager is seeking regulatory approval to sell housing loan investments popular in Europe to UK pension funds, aiming to convince sceptical institutional investors still scarred by the role the asset played in the 2008 financial crisis.
DMFCO — an investor managing more than €25bn of mortgages in the Netherlands — is in talks with the Financial Conduct Authority for clearance to lend and manage housing loans in the UK.
It has also been meeting with potential backers, including large retirement schemes and insurers, to persuade them to take a plunge into a market still associated with the global financial crisis 15 years ago.
UK pension funds, among the largest in Europe, have largely kept away from exposure to home loan-related investments since the 2008 crisis, when securities that included low-quality mortgages were bundled up into a bond and sold to investors.
DMFCO argues its model is different from the 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 pool of mortgages and earn a higher return, but take on all the risk. DMFCO said it is targeting “premium” borrowers with good credit history.
“It is quite a simple model, institutional investors, including pension funds, with very long-term obligations and we essentially match them with housing owners who also have a long-term need to finance their residential property,” said Rogier van der Hijden, managing director of DMFCO.
Its 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 that tougher regulation since the 2008 crisis, including steeper credit checks on borrowers, had addressed many concerns over investing in the sector.
Since its foundation 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, averaging around €800mn each. It aims to do its first deal in 12 months in the UK, if it wins regulatory approval.
“There is a stigma over residential mortgage investments due to the [global financial crisis] but that is now largely unwarranted,” said Simeon Willis, chief investment officer with XPS Pensions, a pension consultancy.
But Gregg Disdale, head of alternative credit at WTW, formerly Willis Towers Watson, said many pension fund trustees may still need to feel “comfortable” before taking any direct plunge into housing loans, particularly around credit risk checks. In particular direct housing loans are less liquid than an RMBS, a traded security.
“Institutional investment in residential mortgages in Holland has been attractive to pension funds because it has typically tended to be much longer dated than the typical UK mortgage, like 10-15 years, which provides a more stable asset for investors,” said Disdale.
“In the UK, as the market has tended not to offer long-dated fixed-rate products, it doesn’t necessarily have the long-dated certainty of cash flows that you get in the Dutch mortgage space,” he said.
Moreover pension funds are increasingly aware they are being targeted by with new products.
Mark Fawcett, chief investment officer with Nest, the £22bn UK workplace pension plan, said he was aware that residential mortgage-backed securities were being suggested to large retirement schemes. “We said we didn’t want any of that as we could not be sure of the underlying risk,” said Fawcett. “We are being very selective.”