EBS customers to vote on change

It's not often that mortgage holders have to think about what financial manoeuvering goes on behind the scenes at their building society. EBS customers are currently considering the merits of securitisation and have to make a decision on the matter shortly.

EBS wrote to more than 20,000 mortgage-holders on its loan book in the past two weeks asking for their advance consent to a new financing measure. Customers who do not reply will be giving their consent by default.

Securitisation is where a financial institution sells a part of its loan book to an investor and gets liquidity in return. It's used by financial institutions to diversify their sources of funds and has becomes common practice in the past few years.

More recent mortgage agreements have a section covering securitisation, but EBS is obliged by the Central Bank to seek the consent of those that don't. Some EBS customers, including Mr E. from Co. Wicklow, are concerned with the decision they are being asked to make.

Mr E says that when he chose EBS, he specifically wanted his mortgage to be with a mutual society. He said it wasn't made clear at the time that his mortgage could be given to any Tom, Dick or Harry. He will reject the proposal.

So where is this recent interest in securitisation coming from and how should customers react? Building societies have traditionally sourced much of their lending from short-term savings and deposits lodged with them, and from wholesale money markets. Recent years have seen a decline in the amount of money saved, combined with a very strong demand for mortgage funds. Now societies are seeking different and cost-effective ways to raise the funds to lend on to mortgage borrowers.

This is where securitisation comes in. The process involves a lender grouping together a number of mortgages and using them as security for raising long-term funding from investors on international money markets. The original lender continues to manage the loans, for a fee, so the borrower's relationship with the lender remains unchanged. The funds raised from a securitisation can be lent on to new borrowers. In effect, the lender recycles existing capital and increases its lending power. The investors who advance the funds against the security of the mortgages are entitled to a stream of income from the mortgage interest payments made by mortgage holders. The amount of income depends on the terms of the securitisation.

Opposing securitisation might in some way limit a society's ability to profit from the current boom, something that would not be in members' interests. EBS Building Society raised €500 million (£394 million) through its first mortgage-backed securitisation last year. First Active, Irish Life and Permament and Bank of Ireland have already gone down the securitisation route.

Unlike the last time, EBS has no securitisation planned at present and is currently seeking consent for future securitisations. The last one accounted for about 12 per cent of the society's loan book but this time the consent letter is just a preliminary step. Mr Mike Lennon, head of treasury at EBS, said that the vast majority of the loan book would never be securitised but that the advance consent would help the EBS to diversify its sources of funding.

"We are giving borrowers the opportunity to opt out. Although we know that this is a complicated issue to explain, customers can rest assured that none of their rights and entitlements will be lost."

Legislation is currently being prepared for the introduction of mortgage bonds, another potential source of funding for the industry, and Mr Lennon said that would be the next opportunity EBS would be examining.