Irish pension funds push into mortgage lending

Irish pension funds will for the first time push into mortgage lending this year, as the combination of low yields and pressure on banks continues to reshape markets.

A non-bank lender in Ireland, The Frank Mortgage, has raised €200m from several of the country’s pension funds and will begin challenging a market dominated by banks once it has raised €250m.

The company hopes to follow a trail blazed in the €660bn Dutch mortgage market, where a host of nonbank lenders backed by insurers and pension funds have provided nearly a fifth of new lending in recent years, up from almost nothing.

“This is a future model for funding mortgages,” said Colin Cunningham, chief executive of The Frank Mortgage, adding that the Dutch model provided “proof of concept” for pension and insurance backed lending.

“I don’t see it becoming the single way we fund mortgages but I do see it becoming a big part of the market,” said Mr Cunningham, formerly the treasurer for Danske Bank in Ireland.

I don’t see it becoming the single way we fund mortgages but I do see it becoming a big part of the market

The challenge of persistently low interest rates is forcing pension funds to examine fresh ways of generating higher returns, including moving into new asset classes. At the same time, new regulations and the legacy of the financial crisis have increased pressures on banks, creating openings for new lenders.

A boom and bust in Ireland’s housing market was at the heart of the collapse in the country’s banking system. That led to a bailout in 2010 and a deep recession. However, its mortgage market is now growing, and a total of €6bn of mortgages is expected to be lent out this year, compared to €5bn last year, according to Davy Brokers.

Proponents of pension fund-backed lending say that the industry’s longer-term funding structure makes it better suited to hold long-term assets. Banks typically borrow short-term deposits to make long-term loans.

The Frank Mortgage, which is working in partnership with a European insurance company, said it planned to originate mortgages through Ireland’s network of brokers.

Political concerns have arisen over the capacity of Irish banks to fund the country’s housing market. A report published in December by Ireland’s economic and social research institute, an independent think-tank, noted that while house prices and rents have recovered from the crisis, housing supply has been “slow to respond”.

“The results of our analysis suggest that in the future the traditional deposit base will be unable to fund the level of credit required to meet the housing demands of the economy,” the report noted.

Mr Cunningham also chairs an Irish defined-benefit pension scheme, though it has not invested through The Frank Mortgage. He suggested that his model would become increasingly common in Europe in the future.

“You’re going to see that QE and cheap funding across Europe will normalise across time, and banks won’t have the same access to that liquidity, and we need new liquidity providers,” he said.

“We will be very competitive in our pricing, based on the fact that we’re matching the right capital with the right borrowers,” he added. “We can be very efficient in the middle”.