U.S. investors gobbled up $4.6 billion in U.K. mortgages last week, with demand high enough to support upsizing the dollar-denominated tranches almost $1 billion from the original amount.

Prime collateral, originated by Halifax Plc, fueled the heavy interest, said a banker at Credit Suisse First Boston, which shared underwriting duties with Citigroup and UBS.

"Anytime you upsize a deal it's going to be because of the transaction being in great shape," he said. "Clearly, that was the case across the board."

With the sterling portion of the deal added in, the total size equated to more about $7.5 billion (see terms p. 37).

Issued by Permanent Financing (No. 3) Plc, this is the third securitization to come from a master trust structure Halifax set up in June 2002. Halifax is a subsidiary of HBOS Plc, the fourth-largest banking group in the U.K. in terms of assets.

Echoing the CSFB banker, one buyside source cited the credit quality of the assets as an appealing factor. "I considered it to be slightly lower-credit quality than a standard U.S. RMBS deal - but still high-quality," he said.

Halifax is the largest issuer of mortgages in the U.K., he added. "It's kind of like dealing with Citibank or GMAC over here. Clearly, it's a good asset that's large and liquid."

Still, stateside investors need to be cognizant of the differences in the U.K. mortgage market, he said. "In some ways, it's worse in that there's no Fannie and Freddie to standardize the market. Therefore, there's no standard underwriting guidelines. But in some ways, it's better because the U.K. borrower does not have the same appetite for leverage that the U.S. buyer has," the source noted.

He pointed to the LTV ratios on the deal to illustrate.

The provisional pool, which consists of 358,277 loans for residential properties in England and Wales, has a weighted-average seasoning of about 39 months (by principal balance outstanding).

The rating agencies pegged the original LTV ratio of the mortgage pool at about 70%, with the current indexed LTV ratio at 46% (both by principal balance outstanding).

"So there's been a huge run-up in housing prices in the United Kingdom. But unlike in the United States - where people would go and take that equity out of the property with a line of credit or a second mortgage - borrowers in the United Kingdom do not seem to have the same penchant for that," the buysider said.

"So even if you have a price bubble - which I don't know if anyone can say definitely whether the U.K. does or doesn't - a drop in price would not necessarily cause a major problem simply because leverage is so low."


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