The decision by DB Mortgages to temporarily withdraw its entire sub-prime mortgage range this month has prompted fears that the deepening US sub-prime crisis is finally hitting the UK mortgage market.
The non-conforming lender is now only writing buy-to-let and near prime mortgages. It also pulled out of writing unlimited adverse business six weeks ago.
West Bromwich Building Society has also withdrawn its latest residential mortgage securitisation deal, citing difficult market conditions.
This follows the collapse of yet another victim of America’s high-risk sub-prime mortgage market. American Home Mortgage, the 10th-biggest homeloan provider in the US, filed for Chapter 11 bankruptcy protection last week.
Deutsche Bank – DB Mortgages’ parent company – and JP Morgan have been named the biggest creditors of AHM.
Last month, two hedge funds run by Bear Stearns firms lost $1.5bn as a result of the problems in the US sub-prime market. US Federal Reserve chairman Ben Bernanke says US defaults could hit $100bn.
Edeus director of packaging Terry Pritchard says: “What has happened in the US market has caused a massive ripple effect but I think it will settle down. It has temporarily stopped some investment banks being quite so keen on this type of business.”
But DB Mortgages managing director Bill Dudgeon denies that the decision to withdraw its sub-prime range is due to the worsening situation in the US. He says the firm has sent an email to packagers telling them it will relaunch its sub-prime products following a repricing in the middle of August.
Dudgeon says: “DB mortgages’ sub-prime product range has been temporarily withdrawn due to changes in pricing. We reprice all the time and remain committed to the sub-prime market. We are on track to reintroduce these products in mid-August.”
Accord managing director Linda Will says repricing in most cases is usually done over a period of 24 hours, not several weeks.
“It is slightly unusual to withdraw for that long just to reprice. DB Mortgages were certainly very heavily exposed in the heavy end of the market. When they first started, they had very high loan to values which is going to accumulate risk much faster.”
John Charcol senior technical manager Ray Boulger believes that there is not doubt that any lender who relies on securitisation is going to find margins pressed even more tightly.
He says: “The US has made investors much more nervous and they are now spending much more time analysing what is in the portfolio. There is no way that lenders such as Edeus and GMAC will not be affected by this.
“The market is much more challenging at the moment and the lenders I have spoken to have certainly said that. When these lenders go and do their next portfolio of sales, they will know that it is going to be harder and they will have to factor it into pricing.”
Will says there is no doubt that the market has got the jitters. She says: “The capacity has definitely shrivelled. What has happened with West Bromwich will be happening to other lenders, too.”
A West Bromwich spokesman confirms that it has postponed its Hawthorn Finance buy-to-let RMBS new issue due to market conditions.
He says: “West Bromwich will review opportunities to return with the transaction when market conditions are more stable.”
Portman group development director Matthew Wyles says: “It is a global market so it will be affecting the UK but it will take time for it to funnel through to the retail end. It is hard to imagine that this is not going to cause some problems for those securitisation lenders.”
Professional Mortgage Packagers Association director Vic Jannels believes that a lot of lenders are looking very carefully at their books, especially those that do heavy sub-prime.
He says: “It makes good sense to limit their exposure. I do not think DB Mortgages are alone. A lot of lenders are looking at it. DB Mortgages started off quite heavily in the heavyadverse market but their range is a bit broader these days. The market is in a fair state of turmoil at the moment.”
Many commentators have denied that the UK will follow in the steps of the US, stating that the economic situation is very different between the two countries.
A Kensington spokesman says there is still real strength in the UK market. He says: “With the FSA so stringent, you don’t see the same type of lending behaviour compared with the US. The housing market is also very different. In the US, supply is exceeding demand which is the opposite to here.”
But Robert Sterling managing director Kevin Duffy says he never agreed with comments saying that the UK market would not be hit by the US troubles. He says: “A lot of specialist lending in the UK is underpinned by US investment banks so to ringfence the UK is quite foolish.”
Boulger points out that this is one of the dangers of setting up a business with only one backer. “The danger you have with a single backer is if it does get cold feet, then you are stuck,” he says.
He says there will be further UK casualties as a result of the US sub-prime market. “I don’t see it deteriorating to the extent of the US. I am surprised we have not seen securitisation lenders being as aggressive with putting up rates but this may come in the next few months.”