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Cracking the Crunch, By Keith Street, head of Kensington

It’s often said that if the US sneezes we catch a cold and, looking back at the last year in the UK mortgage market, it’s hard to argue against the fact that we are suffering from a very bad cold indeed.

It is still unclear how long it will take for confidence to return, but sustainable capital market funding will return in response to strong, and growing, consumer demand and there are a number of indicators that intermediaries can look to, which could signal a thaw in funders’ attitudes.

First, the difference between LIBOR (London Interbank Offered Rate) and the Bank of England Base Rate gives a good idea of how willing banks are to lend each other money and therefore the level of confidence within the debt capital markets.

If the difference between the two is falling then the cost of inter-bank borrowing is decreasing because banks are growing in confidence, so one of the first signs of a return of the markets may be a sustained fall in LIBOR, particularly three-month LIBOR which shows that banks are growing more comfortable lending money to each other for longer periods of time.

A significant indication of the thaw will be the first genuine portfolio of mortgage assets financed at a fair price by a third party. This will effectively signal the re-opening of the securitisation markets for residential mortgages and, to begin with, will almost certainly be a portfolio of prime loans, but confidence returns in stages and a prime securitisation is the first stage of the road to the completion of deals on more risky portfolios. Keep an eye out for rating agencies’ risk-grading of mortgage-backed securities. If these products are being upgraded by such agencies as Fitch, Standard & Poor’s or Moody’s then it is another significant sign of more positive sentiment, but if mortgage-backed products are still being downgraded then investor attitudes towards the sector will remain low.

These are the high-level signals that the funding market is starting to thaw and ultimately there will be a renewed flow of funding for specialist mortgage products, but in the meantime businesses within this market need to review their strategy and operating models in order to survive the short-term and benefit from market recovery.

Kensington’s strategy is built around expectations of the market returning in the future and key to maintaining a platform to take advantage of this return is maintaining a presence in the intermediary mortgage market. Although volumes are modest, a focused distribution strategy can ensure we maintain key relationships, while our monthly tranche system enables to both manage our resources carefully and Treat Customers Fairly by providing certainty of decision in an uncertain environment.

While mortgage volumes are reduced, there is great opportunity to explore new areas of diversification with the backing of our parent, Investec, such as the recent launch of Structured Products. And of course, in the current environment, focus on existing customer books is more important than ever, and we will continue to maintain the high standards that recently secured Kensington an upgrade from Fitch Ratings for its specialist servicer rating.

So, for the foreseeable future, as we find a way out of the credit crunch, Kensington’s business model is based on reduced originations, diversification and a focus on existing customers and if you think about it, this should be a strategy for most businesses in the industry – lender, intermediary or any other type of organisation.

After all, no one is able to write the volume of mortgage business they would like to and so diversification is a great opportunity and, in many cases, a necessity. And, with the wider economy putting greater pressure on individuals’ finances, existing customer management is coming to the fore.

Confidence was the key to the start of the credit crunch, and it will be the key to the return of the market. In the meantime we all need to find a way through the current environment. If we can, we will emerge stronger than ever before.


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