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Warning on Lehmans fallout

Industry experts are warning that the closure of Lehman Brothers could flood the UK residential mortgage-backed securities market with discounted deals that could push down prices.

Lehmans is thought to have around £1bn worth of RMBS on its balance sheet in addition to the securitisations that made up its Eurosail Securities programme.

Over the past year it has been buying back its own RMBS via Eurosail in order to secure capital to pursue mortgage lending.

As a result of it declaring bankruptcy last week, these assets are likely to be sold on the securities markets as its insolvency practitioner PricewaterhouseCoopers liquidates the investment bank’s UK holdings.

Steve Khan, proprietor of the Mortgage Trading Consultancy and a former Lehmans employee, says that lenders with similar portfolios to Lehmans could see their discount prices fall even further as PwC attempts to liquidate the assets.

Khan says: “PwC will have to find a home for all remaining Lehmans-owned securities but I don’t think there will be any problem with regard to selling its balance sheet loans.

“The issue is the number of lenders that have similar collateral on the market as they have been talking up their books and could be forced to drop prices as low as 50p on the pound to compete with the Lehmans sales.”

He adds that Lehmans’ Eurosail portfolios could also pose problems as underlying collateral may need to be broken up and restructured in order to sell it on the market and this takes time.

Another well-placed source says that it is likely that PwC will want to get the process over with quickly.

This would see the market inundated with assets in the lead up to next year.

He says: “If £1bn worth of mortgages from Lehmans’ balance sheet and up to £8bn from the Lehmans-owned Eurosail RMBS were sold en masse it would effectively flood the market. Prices would drop even lower just as we need them to rise.

“But on the plus side, if Lehmans’ RMBS were sold at speed it would clear out some of the bad loans more quickly.”

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