Cleary says new investors into the sector will be looking to make something of their new investments.
He says: “Everything will manifest in 2009 – arrears will go to 4.5 per cent and beyond. But the Government’s attempts to solve the crisis are just a basket case, if anything they will make the situation a whole lot worse.”
Cleary says letting those who cannot pay their mortgages off for as long as two years will simply not be entertained by lenders who have to keep their Residential Mortgage Backed Securities functioning.
“Not one vehicle will accept what the Government is proposing,” says Cleary, “you could do what they want on mortgages sitting on balance sheets, but securitised loans affect bond holders’ interests.”
Cleary says the future for many non-performing mortgages is modification. In the USA, many lenders and owners of assets are choosing to offer lower rates and more affordable fees rather than take their borrowers into repossession proceedings. He says this even goes for hedge funds, which have raised fears of increased repossessions as they buy up more UK RMBS.
“Hedge funds are looking to modify loans,” he says, “it is cheaper in the long run. If they buy a non-performing loan, and then invest in it, it will double in value if it starts performing.
“It doesn’t matter how much it will cost to do that because the discounts are so huge at the moment. Investors of RMBS would rather have a paying, working asset than just foreclose the thing.”
“Investors like hedge funds will want to see the originators have some skin in the game,” he says. “So to begin with they will be looking to buy from the likes of HBOS and Abbey, but will eventually look to the specialist lenders’ books, once things improve.”