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More UK banks are seeking to offload old risky mortgage books as rising property prices provide an opportunity to finally sell out after years of sitting on heavy loan losses.
A number of lenders with legacy mortgages that were written down in value after the financial crisis are pursuing deals with private equity funds that now have access to cheaper financing.
At the same time, appetite for higher-yielding assets among hedge funds and private equity investors in the current low interest rate environment is growing. Over the past 18 months, private equity firms have been able to take advantage of cheap debt to help leverage portfolios.
Andrew Jenke, a partner at KPMG, says: “Will there be more residential performing loan deals taking place in the UK? Yes, because private equity firms have a desire to own these sorts of assets and are becoming more active. The UKAR sale underlines that.”
He adds that there are a number of performing mortgage deals at the moment with bids “in excess” of book value.
Experts say that private equity firms can also be more willing to take on “riskier” mortgages such as higher loan-to-value loans, for example. “Private equity firms don’t have those concerns in the same way banks do, and as long as the interest rate can sustain their financing costs and provide them with a small return, they’re a good owner,” one expert says.
Banks have also had some success shedding non-performing loans – those mortgages where borrowers have fallen into arrears – as they seek to reduce risk, boost capital buffers and exit certain markets.
Lloyds Banking Group, for example, recently agreed to sell about 4,000 non-performing Irish mortgage loans to Lone Star Funds, a private equity group. The bank sold the assets at a discount to their €1.1bn face value, and the sale was capital accretive.
Full article on Financial Times (subscription required)