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It’s no yolk

Readers may recall Edwina Currie’s faux pas that all eggs had potential to carry salmonella, after which much of the nation stopped buying eggs. The story lends itself to today’s mortgage market and the experiences of four lenders are worth looking at for signs of abdominal angst.

We do not know the precise composition and alleged toxicity of the loans which Bradford & Bingley bought from GMAC but I would suggest that caveat emptor and caveat venditor applied in equal measure. Once the market for asset sales reopens, buyers must be more exacting than ever in their due diligence and vendors must equally think longer about the propensity for post-deal whistleblowing.

More remarkable was HBOS’s £500m securitisation which was clearly an explorative foray assisted by the indirect participation of a major industry distributor as an investor. The lender drew some glib remarks in closed circles over the 85 basis points margin on the deal but compared with retail savings rates and the cost of Libor, the pricing of the asset was not the own-goal many said it was.

HBOS will be the first to admit that it would have needed a further 50 basis points to get the deal away in the US market, yet it provoked huge interest at the recent investor conference in Cannes. I would not be surprised to see HBOS go fishing again this year – at acceptable margins – to see if investors will take up its bait. In that context, the success of the pending rights issue takes on critical importance.

Finally, Edeus. Managing director Alan Cleary is an innovative and driven man of late and seems determined to disturb the market’s inertia rather than be sedated by it. Moves into savings products and the outsourcing of due diligence work are clever strategic plays which other lenders are looking to mimic.

Cleary neatly compared traded assets with a market where new cars are temporarily not available. This means that all buyers are presently having to buy secondhand models at a marked discount. These models are then resold after a period of time until depreciation terminates the cycle. Mortgage assets are indeed mirroring this pattern. Until all the secondhand stock is washed through the system and prices return to par, nobody will choose to originate their own mortgage assets.

This is potentially where the long maligned two-year discount loan could help resuscitate the market, as by autumn 2009 the availability of roadworthy secondhand stock will have receded and brokers should see some fresh and alluring products on lenders’ forecourts. Until then, for most intermediaries, it is a matter of pruning costs and surviving.

Kevin Duffy is an independent mortgage consultant

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