Pre-credit crunch, there was an assortment of different types of buyers of mortgage assets. Building societies bought because they could not compete in the previous environment. Private equity used leverage to make a quick buck. Investment banks provided the liquidity to the market by pooling purchased mortgage assets to issue securitisations in their own name or acted solely on behalf of a client. Then add to the mix the investment banks who offered warehouse facilities to the wholesale funded lenders.
When the music stopped in the first week of August 2007, one of the results was that there was a lot – and I mean a lot – of mortgages held by institutions who no longer wanted them. One estimate is that there could still be some £25bn of unloved and unwanted assets awash in the market.
Over the last 18 months, there has already been cons-iderable activity around trading these assets. Most are performing loans, the minority are non-performing and all done in a highly confidential environment with virtually no visibility.
As long as we have this overhang of old assets, it’s difficult to see how the market can move on. Checkmate conceded this a few weeks ago when it announced it was giving up on seeking authorisation. First, nobody is going to get authorised by the FSA as long as the market is still broke. I have no doubt Checkmate, like a lot of us, could originate loans but where do you find a home for it? Where’s the exit?
Second, there is no exit for new originators because there are still assets for sale at huge discounts. Why buy from Checkmate at 102 per cent (a 2 per cent premium) when you can buy today from a distressed seller at 70 per cent (a 30 per cent discount). However, the real problem is that sellers’ and buyers’ price expectations are mostly too far apart to allow the trades needed to clear out this market legacy issue.
The solution? Let’s deal with the fool’s paradise fix first. Some businesses are offering to help out lenders with unwanted pools of mortgage assets by trying to refinance or remortgage the assets to another lender. This can seriously damage your wealth and jeopardise your ability to sell the remaining 90 per cent of the pool that these supermen of the mortgage market cannot re-finance. (I am being generous in conceding they can move up to 10 per cent.)
In advising both buyers and sellers of mortgage pools I have seen too many trades fall over because the pool has been cherrypicked first.
The solution to this market conundrum is to lower your price on the 100 per cent of a pool to a realistic level. There are two roadblocks to this. First, some banks may not have written down the value of this asset enough and cannot face any more embarrassment. Second, there are too many individuals’ jobs at stake. After all, once a mortgage position is sold out, what’s left to do?
Michael Bolton is former chief executive of Edeus