I’ve talked to a number of brokers who want lenders to restore confidence by expanding their product ranges again.
I’m certain lenders would like nothing better than to comply but neither affordable funding nor the means to sell on specialist mortgage ass-ets exist in today’s market. As a result they must pull products and reduce volumes.
The rumour that Lehman Brothers is pulling out of the UK mortgage market remains just that for now but it’s not unexpected. Even the largest investment banks can’t conjure up a market for mortgage assets out of thin air.
If Lehmans shuts up shop it would significantly reduce the number of products available for sub-prime borrowers. This would be a further blow and another step towards technical liquidity problems, generating further deterioration in asset performance.
The collapse in product choice has not yet led to a major deterioration in performance but it’s only a matter of time. A large number of existing borrowers will roll off teaser rates at some point this year or early in 2009. If they cannot refinance, the higher mortgage payments that will kick in are likely to cause spiralling arrears. Unless the market opens up again and lenders can expand their product ranges, clients will struggle.
Whether arrears climb this year or next is difficult to say but the liquidity crisis seems to lead us inexorably down that path.
Where this will end is impossible to predict, but if asset performance degenerates it will only serve to further delay the recovery of the securitisation market as liquidity-constrained investors will be in no hurry to invest in poorly performing assets.
Lenders will arguably gain significant pricing power as demand outstrips supply to an even greater extent. But the ability to sell loans at extraordinary rates will only benefit lenders that are able to fund themselves.
And given the capital constraints facing lenders regardless of whether they are funded through deposits or the capital markets, even expensive mortgage products are likely to remain scarce.
Further redundancies in mortgage departments are likely as volumes remain low, although they may be partially offset by firms looking to bolster their collections teams in the face of more repossessions.
Whichever way the game plays out, it’s difficult to see a way out of the doldrums without fresh liquidity being injected into the industry.