UK's Paragon Mortgage may be scaling back its loan securitizations in 2016, with plans to utilize the increased deposit base at parent Paragon Bank to fund more originations of its core “buy-to-let” mortgage business to family landlords.
Paragon may also have fewer loans to package for investors, regardless, due to UK government changes that are expected to curtail demand later in the year for the “buy-to-let” business.
Paragon, in a quarterly trading update issued Wednesday, said it still expects mortgage demand to remain strong for rental properties, but that the investment base may shift to professional landlords this spring after individual tax breaks expire and higher stamp duty fees are introduced for financing individual investor homes.
“Our buy-to-let lending continues to display an exemplary credit performance and whilst the recent and proposed changes may soften the rate of growth in the sector, the drivers supporting the long term structural changes in the housing market remain as valid today as they have over the last three decades," said Nigel Terrington, chief executive of the Paragon Group of Cos.
Paragon is only a few months removed from a GBP350 million (US$498 million) securitization of buy-to-let loans in November that was issued in both UK sterling and Euro-denominated notes. It was the last in a series of nearly GBP1 billion in buy-to-let securitizations that the company issued last year.
In a research note, Barclays noted the strong deposit base growth of nearly 50% in the first quarter of fiscal year 2015/2016 has allowed Paragon to reduce the warehouse facility used to finance the buy-to-let originations by GBP100 million. “Given the strength in growth in its deposit base and greater diversification of funding, future supply is likely to be lower, in our view,” Barclays noted.
A spike in buy-to-let originations is likely in the next three months as investors look to beat incoming changes to the buy-to-let market. Under recommendations from the Bank of England, certain tax breaks are being removed and higher stamp duty rates imposed on second homes to reign in soaring housing prices and deal with the country’s worsening housing shortgage.
“We continue to expect a spike in buy-to-let origination prior to the introduction of an increase in stamp duty rates by 3% in April this year,” Barclays report stated. “Thereafter, we estimate that transaction volumes could fall by 10-20% based on the impact of previous stamp duty increases.”
Another factor in reduced securitizations is Paragon’s plans to adopt internal risk-weighting standards on its buy-to-let lending, which could reduce the capital required for origination. “Assuming Paragon manages to lower its risk weighting, existing returns on equity could be met with less transfer of risk through securiti[z]ations,” Barclays noted.