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Sink or swim?

The time is fast approaching when mortgage firms are making the final call as to whether they should sink or swim.

With it now being over seven months since the liquidity squeeze hit the mortgage market, it has dawned on many firms that they cannot continue to cling on in the hope that the bumpy ride will end soon.

This week has seen another lender wave the white flag and step away from the market. Rooftop Mortgages, the UK specialist subsidiary of US bank Bear Stearns, has decided to call it a day and will be withdrawing its entire range at 5pm today.

Chief executive officer Ginny Darrow notes that market conditions have continued to deteriorate and admits there are no signs of recovering in the securitisation and whole loan trading markets.

Due to these markets underpinning Rooftop’s strategy, Darrow admits that its origination business has become “unsustainable”.

Rooftop aims to close the origination business by the end of July.

Rooftop’s move follows close on the heels of Lehman Brother’s decision a couple of weeks ago to close its remaining two UK mortgage brands SPML and Preferred.

The industry continues to await for an announcement from Merrill Lynch regarding its two UK subsidiaries Wave and Mortgages Plc, but I expect we’ll hear news of this shortly.

So while Rooftop and many others before it have taken the decision to sink, other firms in the market are more determined to keep on swimming.

In an interview with Money Marketing, Edeus chief executive Michael Bolton made clear that Edeus most definitely has no plans to be one of the firms that sinks.

He says that over the last four months Edeus has been re-engineering itself into what he calls an “asset management” servicing business for the UK mortgage market.

Bolton says that arrears management will be one of the special servicing areas that Edeus will look at. While he admits that it is obviously not an area many people would like to talk about, he believes the area will be one of the main growth areas of the mortgage market.

“It is a service that will become increasingly in demand as we turn into the credit crunch. Dare I say we are moving the business towards the growth area of the UK mortgage and housing market.”

Bolton says that any non-balance sheet lender like Edeus will have to look at other means of business if they want to continue as a firm.

“This market does not allow for any form of non-balance sheet lender. You have to have a balance sheet in order to survive in this market. So in a business like ours we clearly have to look at the value that we derive currently from originating mortgages which currently isn¹t great. Luckily for us there are alternatives.”

Whether other firms will be looking to adapt their business model remains to be seen, but as Bolton says himself the mortgage market is likely to get a lot worse before it gets better. He says: “The first wave has crashed over our economy which was the liquidity squeeze. Unfortunately we are now bracing ourselves for the second wave which is about to crash: the credit crunch.”

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