The terms ‘sub-prime’ and, to a lesser extent, ‘securitisation’ are still considered dirty words by many in the industry, who would prefer to consign them to the dustbin of history.
Michael Lewis’s book, The Big Short, and Adam McKay’s film of the same name last year shed light on the complex cutting-and-splicing of mortgage securities during the boom years that would prove the undoing of the US housing market and trigger a global financial crash.
The finger was pointed at ratings agencies for failing to accurately measure the risk profile of these ill-fated bundles of loans.
Anyone reading last week that Fitch and DBRS had rated the first sub-prime mortgage-backed securitisation since the financial crash might have feared a return of the worst excesses of the boom years on this side of the Atlantic.
Industry pundits are still at pains to distance themselves from those days. In fact, one senior figure contacted by Mortgage Strategy for comment because he had previously worked in the ‘sub-prime’ sector said he did not want his name mentioned in connection with “that word” in the press.
If by ‘the return of sub-prime’ we mean products offering the toxic mix of 95 per cent LTV, permission for numerous CCJs and no requirement for proof of income, then of course it is not on the horizon. The Mortgage Market Review put paid to that type of risk layering.
But if under the term ‘sub-prime’ we also include anything that is ‘non-prime’ or less highly rated than prime – such as ‘near-prime’, ‘light adverse’ or whatever you want to call it – those days are already here.
It is good news, however, that investors are demanding bespoke packages of loans rather than buying securitisations off the shelf as they once did. It means they will be performing more due diligence on the assets they acquire, which can only be a good thing for the market as a whole.
Lenders will need to have a really good grasp of the credit quality of any loans they intend to sell on, which means greater accountability.
For the mortgage market to function at its optimum level and avoid repeating past mistakes, lenders, brokers and borrowers all need to take ownership of their actions.