View more on these topics

Lenders must master art of flexibility

As the mortgage market matures, funding methods for lenders are becoming more sophisticated.<

Lenders have to make sure that they remain flexible to react to market conditions. Getting funding at the best price while ensuring sufficient liquidity is important for efficiency. But funding and portfolio decisions are also crucial in terms of risk management, especially in the sub-prime sector. The art of staying flexible is not easy to master but it is one lenders must strive towards.

The lesson I will concentrate on here is ensuring diversity in funding sources and mortgage portfolio. An important weapon in achieving this is portfolio trading – a market that has become more mainstream and will continue to develop.

Lenders overly reliant on one funding channel will find that difficulties in this channel will severely hurt their business. A mixed strategy is important to maximise returns and reduce risk. Ensuring balance means some mortgages are bundled together and securitised, others are sold off as part of whole loan sales and the rest are simply kept within the lenders’ portfolio.

All these options have advantages and disadvantages in terms of returns, liquidity and risk. But ensuring a balance with a reasonable degree of diversity is crucial. A lender should not become overly dependent on any one option as this will impede its ability to react to changing conditions in both the primary and secondary mortgage markets. Similarly, those lenders whose mortgage portfolios are overly-dominated by a particular variety of mortgage are exposed to unnecessary risk.

It is at this point we turn to the weapon of portfolio trading. The expansion in whole loan trading is helping drive more sophistication in funding. Some lenders are finding they can achieve better execution through whole loan sales than through securitisation. They can get a better price and immediate profits. But perhaps more important, lenders are realising that through buying and selling mortgage pools they can help mitigate the risks they face.

The whole loan trading market will continue to develop. More transparency is needed so risks can be properly analysed and contracts must become more standardised so negotiations between buyers and sellers can be more time and cost efficient. These changes are underway and are making the market more attractive. At the moment it takes months to facilitate a whole loan trade but this will come down to weeks, if not days.

Lenders that develop their use of portfolio trading will have an advantage. It is an important weapon in ensuring diversity in funding and portfolio structures. And its deployment is crucial to mastering the art of flexibility.michael culhane is chief executive of The Oakwood Group


Huntswood sponsors Scottish Finacial Enterprise Innovator Awards

Huntswood has confirmed its support and sponsorship for the Scottish Financial Enterprise Innovator Awards. Huntswood is committed to the financial services industry within Scotland. In November 2004 it opened an office in Strathclyde Business Park that has created 250 jobs to date. It is expected that jobs will continue to be created to the end […]

Youens is to quit Flower and go Live in December

Flower director Trevor Youens is to leave the company and join Home Information Pack specialist the Live Organisation, at the end of this month. Youens has been with Flower for four years but says it’s time to move on. He will be joining Live, part of the First Title Group, as director in a few […]

Leeds introduces fee-free 10-year fixed rate mortgage

Fee-free version of best buy 10 year fixed rate mortgage Following the launch last week of its 10-year fixed rate mortgage at 4.69%, Leeds has introduced a fee-free version at 4.99%.It comes with a free valuation, a 10% capital repayments allowance each year and free legal services for remortgages.Karen Wint, head of marketing and PR […]

Plum adds two more links to its software

Plum Software, has added two links to its software. Legal & General and Transact are the latest links to go live with a further six provider links expected go live soon.By linking directly to providers’ extranets and other financial services, advisers and brokers using Plum Software can obtain the latest fund information for all the […]

The return of inflation

Alex Ralph, manager of the Artemis High Income Fund, sees further pressure on government bonds as inflationary pressures build on both sides of the Atlantic.


News and expert analysis straight to your inbox

Sign up