View more on these topics

Off balance

Sub-prime meltdown seems to be the focus of the news at the moment. It is worth having a look at some of the fundamentals and what is likely to happen when, as it certainly will, a new stability appears in the marketplace.

As many readers will be aware, most sub-prime loans are financed at warehouse stage by commercial paper programmes and subsequently by securitisation. The remaining market lies in whole loan sales largely with the group of lenders somewhat inconsistently described as balance-sheet lenders.

All these markets are effectively shut on a global basis as a result of the US sub-prime crash and, more importantly, the uncertainty about who will pick up the final tab in the increasingly complex collateralised debt obligations and derivatives markets. Investor confidence is at a massive low for all these asset classes and it will take time until there is greater certainty about where the ultimate liabilities lie before a stable new market condition returns.

An almost inevitable outcome is that funding margins will increase and tighter credit will be demanded by the market. The big problem is that nobody knows where this appetite will lie until the market stabilises and thus the real nightmare for non-conforming lenders is where to set their prices today in anticipation of a new wholesale market dynamic that nobody can really estimate.

Don’t think that this impact is restricted to non-conforming lenders. The vast majority of UK lenders rely on the wholesale markets for degrees of their funding and there will inevitably be a ripple effect running through these markets which will make access difficult in the interim and ultimately higher margins and tighter credit will predominate when the market settles down. This is best shown by premiums being currently paid for whole loan sales, which are depressed considerably, putting further pressure on those lenders which rely significantly on this exit route.

One thing, however, is certain and that is that a new market will emerge and the short-term advantage being seen by the so-called balance sheet lenders will not last for long. One product of this will be to prevent the UK following the US example.

Over the past year, margins on non-conforming loans have slid to an unacceptable level due to competition in the marketplace and we are likely to see this reverse with a reversion to a purer price risk equation. There will be casualties and they will not all be in the non-conforming sector. The liquidity crunch may cause earlier casualties elsewhere.

Mark Chilton is managing director of Homeowners Mortgages


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm