The end of 2021 saw an upsurge in mortgage portfolio transactions, which we are expecting to continue throughout the coming year, as well as a general focus on building portfolios with the introduction of various new funding structures.

In this series, we’ll be exploring what acquirers should consider as part of their due diligence in 2022, particularly given the substantial legal, regulatory and policy changes impacting the mortgage market in recent years.

Hot topics include the Financial Conduct Authority’s (FCA’s) formal announcement that LIBOR would be phased out from 31 December 2021; green finance; the issues associated with the use of cladding and certain high-rise buildings being deemed unsafe; escalating ground rents; new types of claims that are beginning to be brought by claims management companies; and potential questions around the assignability of government support loans.

LIBOR transition

Although 24 LIBOR settings are no longer available from 31 December 2021, and despite best efforts for proactive transition across the mortgage market, there will be many lenders with the toughest of tough-legacy contracts, where active transition has not been possible during 2021 and who are considering their next steps in early 2022.

In particular, many will be waiting to see whether the FCA will continue to compel publication of "synthetic LIBOR" beyond the end of 2022, without limitation or restriction, and any longer term plans for a permanent legislative solution that builds on the implementation of the Critical Benchmarks (References and Administrators' Liability) Bill.

During 2022, we are likely to see customer contact exercises continuing across the mortgage market and potentially further policy work on the future of synthetic LIBOR. It will therefore be important for a mortgage portfolio acquirer to establish the extent to which a portfolio has been impacted by LIBOR being phased out.

If a portfolio has been affected, then as part of its due diligence, the acquirer should consider:

  • the transition strategy the portfolio holder put in place;

  • any customer engagement/feedback on the transition strategy; and

  • any ongoing reliance on a synthetic LIBOR setting for loans within the portfolio, and what further work may be needed to transition to a permanent replacement rate.

Green mortgages

The race is on to develop tomorrow's green finance products and secure their role in the economic recovery. Throughout 2021, we have seen a significant acceleration in the launch of green mortgage products in the UK.

Following the government publishing its Net Zero Strategy and Heat and Buildings Strategy in 2021, there is much on the radar from a policy perspective as we head into 2022:

  • The Department for Business, Energy and Industrial Strategy (BEIS) is expected to build on its consultation on improving the energy performance of privately rented homes to EPC band C by 2028.

  • BEIS will look to use "natural trigger points" to improve the energy performance of owner-occupied homes (potentially with sale, mortgage activity and repairs/improvements being trigger points).

  • To help “kick start” green finance, BEIS has consulted on introducing mandatory disclosure requirements for mortgage lenders on the energy performance of homes in their book and setting voluntary improvement targets for 2030.

  • BEIS will look at ensuring that all homes meet a net zero minimum energy performance standard before 2050, where this is cost-effective, practical and affordable.

Although it is likely to be some time before any mandatory disclosure standards are formally introduced into the mortgage market, portfolio acquirers should consider now, as part of their due diligence, the extent to which they can obtain energy performance data as part of the transaction (and develop an understanding of the overall balance of the portfolio in relation to the energy performance of the underlying properties) in readiness for the potential introduction of such standards.

The issues detailed in this article are only the tip of the iceberg; there are of course many other new and developing issues that sellers and acquirers will need to be alive to in future transactions. We will be addressing many of these developing issues in the rest of this series.

This article was first published by Mortgage Finance Gazette

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2022. Specific advice should be sought for specific cases. For more information see our terms & conditions.

Date published

13 January 2022

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