View more on these topics

Rating downgrade was warning shot

This week my column carries a health warning – it contains scenes of mild peril and references to securitisation.

You may be thinking securitisation is about as exciting as watching wood warp and from an intermediary’s point of view that may be true. The problem with securitisation is its lack of visibility. By nature it is a process that is one for the back room boys.

But hang on, securitisation is an essential element of not only the UK mortgage market but mortgage markets across the world. The heartbeat of product choice in this country’s mortgage market is lenders’ ability to securitise.

Consider how the market looked before the mid-1980s. Lending was controlled by a tight band of lenders that looked like a cartel and lent off balance sheet. Then came securitisation and the market transformed itself overnight. There was a ready flow of funding for consumers’ mortgage requirements. The old barriers to entry had been swept away.

Fast forward to 2006. Things look just as rosy, with plenty of funds to supply customers’ needs. From the financial market’s viewpoint performance has been good. But more importantly the rating agencies have been happy – until recently that is. The fact is that the rating agencies have not needed to downgrade any residential securities until the past few weeks.

Then, two weeks ago, one unfortunate lender’s security became the first to be downgraded since the late 1990s – a pretty nasty fate to befall any security. All lenders take note.

In the heat of doing business and competing – which all serious lenders have to do – it’s all too easy for lenders to overlook credit quality and underwriting standards.

For those lenders that relax underwriting standards there will be a sting in the tail. Lenders that take a relaxed view of the twin essentials of credit quality and underwriting standards will need to review their policies – and quickly. The capital markets will act without mercy when it comes to such lenders’ securities, and rightly so.

But there is a need for some perspective here. I’m sure the downgraded lender is just an isolated case. But there will be ripples with the potential to cause problems in securitisation markets in the short term.

Should we be concerned? Not overly. But we must be clear that a threat to securitisation will be a threat to the lending market as a whole.

The rating agencies are watching, as they are supposed to. Any action they take is likely to have a knock-on effect. Lenders looking to aggressively build business by volume without paying due regard to underwriting standards have just heard a loud warning shot.


EBay trading boosts self-cert

The increase in people supplementing their income by trading on eBay is helping to propel the self-cert market, says GMAC-RFC. The UK version of the online auction site hit the 10 million user milestone in February last year, and it is estimated that one in three internet users visits the site at least once a […]

FSA appoints chairman of Smaller Business Practitioner Panel

The Financial Services Authority has appointed Mark Rothery as chairman of the Smaller Businesses Practitioner Panel. He succeeds Ruthven Gemmell who, having served a two year term as chairman – stands down and assumes the role of deputy chairman for one year. Rothery is chief executive of the Ancient Order of Foresters Friendly Society. The […]

TMP apologises for email glitch

The Mortgage Partnership has apologised for a fault with its email system last week which resulted in repeated emails being sent to brokers. TMP emailed out a product launch during which a mail loop occurred resulting in the original email being repeatedly emailed to everyone on its distribution list. TMP says it has rectified the […]

Don’t get buried by cascade systems

Cascade systems are only safe for brokers if they research the whole of the market and can prove to the regulator that this has been done, says Richard Coulson


News and expert analysis straight to your inbox

Sign up