Lloyds bond sale could boost first-time buyers

by Ed Bowsher on 22 September 2009  |  0 comments
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Lloyds’ plan to sell a major slug of mortgage-backed bonds may lead to a significant thaw in the mortgage market.

Lloyds Banking Group's plan to sell a major slug of mortgage-backed bonds is a very significant move. It might be the start of a real thaw in the mortgage market.

Lloyds is going to raise more than £2.8bn from selling mortgage-backed bonds.

In other words, investors will pay Lloyds £2.8bn for some bonds. In return, Lloyds will pay the investors an annual interest payment and will eventually pay back the value of the bonds.

This isn't an airy promise by Lloyds because the bonds are 'backed' by a selected bundle of mortgages. This means that Lloyds must use much of the income it receives from the mortgage bundle to pay out interest on the bonds.

In normal times, a bond sale like this wouldn't be newsworthy. But it's significant because Lloyds hasn't done a deal like this since summer 2007.

Now you might think this is bad news. You're probably read that mortgage-backed bonds were a major factor behind last year's financial collapse. And that's true. Toxic mortgage debt was a major problem.

But the problem wasn't mortgage-backed bonds in all forms. Mortgage-backed bonds contributed to the crisis for three reasons:

• Some banks became over-reliant on the bonds for funding. Northern Rock being an obvious example.
• Some investors bought bonds that were backed by poor quality sub-prime mortgages. And they didn't even realise the mortgages were poor quality!
• Even worse, investors borrowed heavily to buy poor quality bonds and then sold the bonds on to other buyers. So when things went wrong, some purchasers were lumbered with massive debts they couldn't repay.

However, what Lloyds is doing in 2009 looks more rational. According to breakingviews, the bonds are backed by 513,000 of Lloyds' own prime UK mortgages. Different mortgages of different quality aren't being bundled together. And there's no dodgy US sub-prime mortgages.

Yes, there's a danger that the banks could get carried away and return to the debt-fuelled madness of the mid-noughties.

But Lloyds' deal on its own looks prudent and is a positive move. The bond sale will give Lloyds a reliable source of cash that it can then lend to homebuyers.

Lloyds is currently funding its mortgage lending from a combination of ordinary savers and expensive wholesale money markets. If it can now supplement its funding with sensible sales of mortgage-backed bonds, it may be able to offer a wider range of competitive mortgage products. Eventually that could get us to the stage where first time buyers with 10% deposits can get decent mortgage deals again.

Let's hope so anyway.

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