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CALLING ALL ACQUIRERS TO THE RESIDENTIAL MORTGAGE MARKET

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CALLING ALL ACQUIRERS TO THE RESIDENTIAL MORTGAGE MARKET 1

Alex Maddox, Director of Business Origination and Development, Acenden

Over the last year, the UK’s residential mortgage market has witnessed strong interest from potential investors. This interest has been sparked, in particular, as banks have started a process of deleveraging their non-core units (including their residential mortgage portfolios) in a bid to boost capital margins, generating renewed vigour in the market. According to Ernst & Young, the market for secured mortgage/loan transactions has developed significantly in the last 12 months. Its recent reporti states that the markets – for both non-performing and performing assets – are proving increasingly attractive to institutional investors wishing to deploy funds against credit-related products.

Calling all acquirers to the residential mortgage market Alex Maddox

Calling all acquirers to the residential mortgage market Alex Maddox

As with all prospective investments, potential acquirers of these portfolios need to carefully analyse their risk positions to ensure they will be able to achieve optimal rewards. For example, investors need to pay close attention to both current and forecasted macroeconomic variables, as these will have an impact how likely it is that mortgage borrowers will keep up with their payment.

For better portfolio performance, investors need to adopt a dual approach. Prior to acquisition, they should apply analytical models at both a loan and portfolio level to understand more about the health of a loan book. If they then acquire the loan book, investors must consider how they intend to service the loans on a day-to-day basis – servicing being the continued administration of the individual loans, including the overseeing of payments and collections and the management of arrears.

If investors apply these forecasting and servicing strategies successfully, they can potentially reach appealing risk-adjusted yields of between six and nine percent, which compares well with other investment instruments available.

Phase 1: Bidding
As investors need to actively assign a value to the portfolios they are interested in during the bidding process, this stage is a key moment for them to conduct stress testing. This allows them to assess the portfolio’s risk exposure, playing different macroeconomic scenarios against the borrowers’ profiles to judge potential performance.

A key consideration in this stress testing is the Bank of England (BoE) base rate. Mark Carney, the current Bank of England Governor, has announced his intention to keep the BoE base rate low for the next few years until core indicators such as the unemployment rate drop. This would suggest that the short-term macroeconomic outlook is quite stable. However, in the long-term, borrowers may encounter problems should the base rate and, consequently, inflation, increase. Changes to these variables can place strain on borrowers’ monthly affordability – their financial capacity in any given month after mandatory deductions.

With this in mind, investors should focus on using analytical outputs to explore how well a portfolio will perform over a number of years, to ascertain how profitable the investment will be.

These outputs can be quite severe. Multiple research papers have highlighted how small macroeconomic changes can impact a typical mortgage portfolio in the UK. For example, according to data from the Mortgage Fiscal Cliff research paper published in May 2013, an interest rate rise of just two percent above the existing base rate, while all other variables remain equal, could have an impact on over half a million loans. This would then place over 150,000 of these at risk of falling into immediate arrears. It is these types of outcomes which investors need to be mindful of when considering a bid. That way, they can understand more about the profitability and risk profile of the loan book and, more importantly, if it is a worthwhile investment.

Due diligence is another key step at this point of the acquisition process. Specifically, investors need to check whether individual repayment plans are enforceable, update borrower credentials and verify property values. While it is not always feasible to gain the appropriate levels of information, desktop research and land registry checks can often provide a decent overview of the properties in question, without sacrificing too much time and resources.

Post-acquisition servicing
After purchasing a loan book, investors also need to instigate an effective servicing strategy to ensure the loans are managed correctly. Without this, portfolio owners will feel the full force of regulators should their record keeping and decisioning procedures prove sub-optimal.

Many investors have found that a streamlined servicing strategy requires a level of expertise and resources seldom found in-house. It is therefore becoming more and more common to outsource this process to third parties. Partnering with an expert external party provides investors with servicing tools, an operations team and the wider market knowledge to prevent loans defaulting, ensure regulatory compliance and, overall, optimise forbearance procedures should borrowers encounter problems. While it is inevitable that some borrowers will experience negative financial changes during their lifetime; with the support of the latest automated technologies and analytics, portfolio owners can keep borrowers on affordable plans. This maintains borrower relationships, without compromising the profits on the initial investment.

Piecing together the jigsaw
If pre- and post-acquisition procedures are carried out in the correct manner, investors are well positioned to capture lucrative yields from the residential mortgage market. In order to achieve this margin, however, all elements of the puzzle require attention – appropriate counsel and forecasting for acquirers during the bidding rounds and an intelligent servicing strategy to manage the individual loans post-acquisition.

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Investment Roundtable: Live with Jim Bianco

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With Q4’s macro picture still looking grim amid the return of exponential coronavirus waves in Europe and the U.S. and Europe, we speak with veteran macroanalysis strategist Jim Bianco, CMT for a data-driven deep-dive into the global economy and financial markets on Sept. 7th at 12pm EDT.

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Key themes:

  • Learn from Jim’s unique combination of quantitative and qualitative analytics which provide an objective view on Rates, Currencies and Commodities to make smart investment decisions
  • Identify important intermarket relationships he is watching with respect to Global Equities
  • Roadmap a global outlook for 2021 in view of socio-political backdrop giving viewers key takeaways and intermarket perspectives on global investing.

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Jim’s robust technical analysis includes a broad look at trends and themes in the markets, market internals, positioning such as the Commitment of Traders (COT), sentiment, and fund flows. Don’t miss out on this exclusive session from one of the investment world’s most insightful thought leaders.

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Equity markets react to a rise in Covid-19 cases, uncertain Brexit talks and the upcoming US election

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Equity markets react to a rise in Covid-19 cases, uncertain Brexit talks and the upcoming US election 2

By Rupert Thompson, Chief Investment Officer at Kingswood

Equity markets had another choppy week, falling for most of it before recovering some of their losses on Friday and posting further gains this morning.

At their low point last week, global equities were down some 7% from their high in early September. US equities were down close to 10%, hurt by the large weighting to the tech giants which at least initially led the market decline.

The market correction is nothing out of the ordinary with 5-10% declines surprisingly common. Indeed, a set-back was arguably overdue given the size and speed of the market rebound from the low in March.  As to the cause for the latest weakness, it is all too obvious – namely the second wave of infections being seen across the UK and much of Europe and the local lockdowns being imposed as a result.

These will inevitably take their toll on the economic recovery which was always set to slow significantly following an initial strong bounce. Indeed, business confidence fell back in September both here and in Europe with the declines led by the consumer-facing service sector. A further drop looks inevitable in October – fuelled no doubt in the UK by the prospect that the latest restrictions could be in place for as long as six months.

The job support package announced by Rishi Sunak did little to boost confidence. Its aim is to limit the surge in unemployment triggered by the end of the furlough scheme in October. However, the scheme is much less generous than the one it replaces as the government doesn’t want to continue subsidising jobs which are no longer viable longer term.  A rise in the unemployment rate to 8% or so later this year still looks quite likely.

Aside from Covid, for the UK at least, there is of course another major source of uncertainty – namely Brexit. Another round of trade talks start this week and we are rapidly reaching crunch time with a deal needing to be largely finalised by the end of October.

Whether we end up with one or not is still far from clear. That said, the prospects for a deal maybe look rather better than they did a couple of weeks ago when the Government was busy tearing up parts of the Withdrawal Agreement. With significant Covid restrictions quite probably still in place in the new year and the Government already under attack for incompetence, it may not wish to take the flack for inflicting yet more chaos onto the economy.

Markets remain unimpressed. UK equities underperformed their global counterparts by a further 2.7% last week, bringing the cumulative underperformance to an impressive 24% so far this year. The UK weighting in the global equity index has now shrunk to all of 4.0%.

It is not only the UK which faces a few weeks of uncertainty. The US elections are on 3 November. We also have the first of three Presidential debates this Tuesday. Joe Biden’s lead looks far from unassailable, a close result could be contentious and control of Congress is also up for grabs.

All said and done, equity markets look set for a choppy few weeks. Further out, however, we remain more positive – not least because the focus should hopefully switch from the roll-out of new lockdowns to the roll-out of a vaccine.

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What Investors are Looking for in the Next Fintech

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What Investors are Looking for in the Next Fintech 3

By Shaun Puckrin, Chief Product Officer, Global Processing Services

Are investors getting pickier when it comes to fintech? It’s hard to say for sure, but there are recent developments that point towards a shift in investor interests.

Firstly, research from Innovate Finance shows that investment in UK fintech dropped by 39% in the first half of 2020, compared to the same period in 2019. In H1 2020, $1.8bn of venture capital was invested in 167 startups compared to H1 2019, when $3bn was invested in 263 startups.

However, it’s worth mentioning that the $1.8bn UK fintech investment earlier this year was still a 22% increase over the second half of 2019, when funding totalled $1.5bn. Therefore, all signs suggest that investors will make significant increases in capital investments during the rest of the year.

Secondly, it appears that the current investor appetite is for more mature, later-stage fintechs: more than half of the $1.8bn went to just five companies: Revolut, Checkout.com, Starling Bank, Onfido and Thought Machine. Perhaps it is the ongoing economic uncertainty surrounding the COVID-19 crisis that is prompting inventors towards perceived “safer bets”, but what we do know for a fact is that early-stage fintechs raised just 8% of the total investments.

Is there a silver lining? The coronavirus crisis has rapidly accelerated the digitisation of financial services, with lockdown restrictions encouraging those previously resistant to engage with digital financial services. The stage is set for fintechs to thrive and deliver offerings that meet shifting consumer demands. To be in with a shot of wooing investors, fintechs will need to demonstrate certain qualities that set them apart from other companies.

So, what are the four things investors are looking for in the next big fintech?

  1. A strong, differentiated proposition

The fintech marketplace is crowded and filled with mature innovators setting a high standard for everyone else. Against this backdrop, “challenging the incumbents” is, unfortunately, no longer a USP.

To really catch the attention of investors, you must be addressing a clear, pressing market need that no one else is tackling. Not just that, your proposition must be easily articulated and backed to the hilt with market research that proves the opportunity is worth pursuing.

Ultimately, investors are going to ask the question: why you? What are you doing that’s unique? What do you have that means you – and only you – can do this? They will also want to know how defendable that proposition is once you’ve built it.  What is your moat? Getting this right means a foot in the door with investors.

  1. A path to profitability or exit

This is an extremely pertinent point, especially given recent news surrounding the financial results for many of the big challenger banks, and how they show the route to profitability for challengers isn’t necessarily straightforward or easy.

In the current environment, an attractive fintech must be able to demonstrate a concrete, long-term plan for the financial viability of the business. There are different paths for investors to make their returns, be it a trade sale or IPO, but the fundamentals of securing a successful outcome are usually the same. By being able to demonstrate how you can plot a course to attract and serve your customers for less than you can monetise them will be at the route of any subsequent valuation, no matter how its outcome is achieved.

Whatever the goal, you need a plan to support your ambitions. You need to demonstrate an understanding that building a scalable and sustainable fintech is likely to require significant capital – you must invest in the right people, partners and technology to make money. Developing competitive services, attracting customers and, crucially, monetising your offerings, requires hard work and the ability to adapt to your customer’s needs.

  1. Strong leadership and core team

Ultimately, securing investment is about building relationships and what often tips the scales is having the right people in the room. This is why a great team is crucial.

A great team means many things: Strong leadership with the vision to build something revolutionary. The skills and expertise to turn that vision into reality. The experience to traverse the pitfalls and opportunities you’ll face. And finally, the ambition and determination to make the business successful no matter what.

Building the right team with the right qualities is often what convinces investors that they’re putting their money in the right place.

  1. The right partnerships

Partnering with the right organisations can give you strategic access to the solutions that will help build and scale your offering. Their expertise and experience are often invaluable; many partners have been in the game for years and may have already solved problems you might be encountering for the first time.

From an investor’s perspective, seeing that you’re working with credible partners and proven tech helps build confidence. It shows that you’re a less risky investment, and that you respect their investment and are going to be using their money to build real value.

Fintech investment is not dead

After this recent blip, we expect the amount of investment into fintech to continue to be significant, at least in relation to other industries. But there’s no avoiding the fact that investors will be looking to stress test potential investments much more than before.

By creating a differentiated proposition, planning a clear route to profitability, building a strong team, and finding the right partners, fintechs will be in with a shot of securing the funding they need to make their grand vision a reality.

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