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Mortgage funding: Europe set for whole loan revolution

Whole loan sales will offer a growing funding alternative for mortgage lenders

Standard & Poor's predicts a sharp increase in the use of whole loan sale technology in Europe, offering mortgage originators a meaningful financing alternative to retail deposits or the costs of small-scale securitizations.

Whole loan sales drive the US residential mortgage-backed securitization origination process and Europe's fast-maturing mortgage sector has reached a level of sophistication and liquidity where the same technology can be deployed.

In the US, whole loan pool sales of $1 billion are a regular event, and can rise as high as $3 billion.

Mortgage originators in Europe, especially the UK, have now begun to pursue whole loan sales. The vendors are typically non-conforming originators who use their near prime assets for whole loan sales. Vendors have previously found the UK mutual building societies a useful source but they can rarely provide portfolios above £200 million ($364 million).

This is where the investment banks step in. Originators can immediately realize the value of assets sitting on the balance sheet at a profit – as the sale price is actually greater than face value. For investment banks, the process is driven either by the aim of extracting value by structuring or repacking the assets themselves in a securitization.

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