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Dawn of the un-lender

The political debate continues to hot up on what to do with the rapidly deteriorating housing market. The Government upped the ante recently with mortgage interest relief for the unemployed.

How many of these piecemeal declarations of support are we going to see over the next 12 months and where is the long-term thinking in our market? Typically with this Government, we have yet to see the detail and exactly how the industry implements it.

However, equally predictable was the vested interests that profit from the repo market trotting out the standard line “best to repossess early so that any equity left in the property can be returned to the borrower, etc, etc”. Who do they think they are kidding?

In a market with house values already down by around 15 per cent, throw in a further reduction for a repo and then stir with a whole bunch of capitalised interest, “fees” and whatever else can be added to the balance and unless the borrower started with a 30 per cent LTV he is not going to see much equity returned to him. And I don’t bump into many people in difficulty with their mortgage payment on sub-50 per cent LTVs.

So the private equity/hedge fund-backed “investors” and their various conduits in the legal profession are all shouting caution. Well, they would, wouldn’t they?

The last thing they want is anything that stems the flow into their pockets. As it is, the Council of Mortgage Lenders is now predicting 75,000 repos in 2009 (and I am still standing by my 100,000).

Have some sympathy on the private equity/hedge fund world – the latest forecast is that two-thirds of them will be gone by next Easter. They are not the doyens of our business world – most have been as exposed along with the rest of the banking sector. What they are trying to do is shore up what is left of their balance sheets by targeting distressed borrowersI liken this activity to predatory un-lending. What is this? Well, the US had a problem back in the boom years with what they called predatory lending. Unscrupulous lenders targeted those least able to understand the small print. Over-committed and falling into arrears, the typical sub-prime borrower was then subject to the lender’s dual interest rate policy, which allowed for a doubling of their rate if they fell into arrears.

This is a great strategy in a rising market of 10 per cent to 15 per cent per annum because with LTVs capped at 80 per cent there is huge upside to capitalise the various fees etc, repo and sell at a profit. Most of the states in the US enacted legislation to outlaw this (and in the UK at a similar time, we had the OFT guidelines on unfair lending).

So what is predatory un-lending? (and I welcome a more user-friendly label). It is the strategy of buying non-performing mortgage loans from the originating lender with the deliberate intent of repossessing as quickly as possible.

This also requires the convenient flouting of the FSA’s rules on TCF in arrears and possession management because usually this type of predatory un-lending is by a non-authorised or regulated hedge fund or its third-party administrator conduit.

There is no intent to agree any loan modification with the borrower – it is all about making that quick turn on the property value (remembering that there are now sellers of this asset prepared to take less than 50p in the £).

Of course, this is part of a larger, wider phenomenon not seen before in the UK. Liquidity has not improved. Yes, the banks are getting recapitalised but that has no direct influence on their ability to fund. The Bank of England’s special liquidity scheme continues to be a joke. On top of this, there is still a huge logjam of old mortgage assets to be unravelled.

Northern Rock has reduced its balances by £19bn, so only £81bn to go then. And can you imagine what the taxpayer is going to be left with of unsellable high LTV assets?

Then there is the MEX/ Kensington/GMAC book at Bradford & Bingley and still the circa £30bn legacy asset at the investment banks. And what of Lloyds’ ability to fund the massive HBOS mortgage book? Is it any wonder that we still have huge problems funding new lending at levels that the UK has seen in recent years?

In the spirit of the pre-Christmas sales in the stores, if you have clients with cash, there are some great bargains to be had. Check who their mortgage is with – if it is vaguely esoteric or a non-household name, then speak to the mortgage owner and ask after discounts if the loan is repaid.

My old outfit was one of the first offering discounts up to 10 per cent, swiftly followed by the Oakwood/ Credit Suisse vehicle offering 15 per cent, ABN Amro’s Topaz SPV had an offer and the most recent and generous was Capstone’s 30 per cent discount. Capstone is the Lehman in-house administrator looking after brands like Preferred and SPML – now all in the hands of the administrator PWC, who, of course, needs to offload the assets.

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