Maybe this is something for those readers of a slightly older disposition to answer, but do you ever see dominoes being played in pubs any more?
I don’t know if this is a stereotype that has filtered down through the years, but weren’t pubs once filled with old men drinking ale and playing a few games?
Maybe this is just a misconception, kind of like the one that says that all women in the North West over the age of 35 drink gin and tonic by the gallon. Or maybe the idea is utter rubbish and I’ve just wasted a minute of your life.
What can’t be argued against though is young kids playing dominoes. Whether it was playing properly with a grown-up or just lining them up to knock them down in a few seconds of deconstructive madness, most people will have some experience in the back of their memory.
It is the latter of these options which, of course, gives rise to the expression ‘domino effect’ and this term has been bandied around quite frequently over the past week or so in the mortgage market.
However, people have not been talking about little black and white tiles. Instead, they have been musing as to whether we are about to see such an effect take shape among the US lending institutions which have set up in the UK over the past couple of years.
A surprise withdrawal?
The withdrawal of Morgan Stanley from the UK market, and the subsequent closure of its UK lending arm, Advantage Home Loans, had been rumoured in the weeks running up to the actual announcement, but it was still a bit of a surprise when hearsay was confirmed as fact.
Morgan Stanley’s position was not unique within the lending community and commentators believed that once one player drew back across the Atlantic, it would set in motion a chain of events which would see a number of its American counterparts ‘get out of Dodge’.
As Mark Sismey-Durrant, chief executive at Heritable Bank, comments: “Historically, the Americans have come over, but at the first signs of a cold they have high-tailed it back to the States. I think it has surprised everyone that it stayed open for as long as it has.
"The credit crunch has shown no signs of letting up and if you are a lender who is reliant on securitisation, then your business model just isn’t working at the present time.”
Waving the white flag?
The problems with the securitisation market have been well documented but they have affected every lender in the UK market; whether they fund using the money markets or not. Therefore, it isn’t just the lenders with US backers that are waiting for the thaw.
However, as Sismey-Durrant points out: “They have got their own problems back home. They may seem to be big lenders in the UK but the operations are pretty small in terms of the scale of the company.”
Therefore, the $64,000 question is how long will they want to hold out?
For Kevin Friend, strategic partnerships director at mortgages.co.uk, it is all about attitude.
“The romance with the specialist market for overseas lenders is over. I don’t see a domino effect though, but the state of the market dictates everything.
"They will be here as long as they can fund a loss-making entity. Morgan Stanley’s decision doesn’t affect the other institutions but it does indicate that Morgan Stanley is prepared to write off a significant investment in – and this is the important point – a prime and specialist lender, not a solely non-conforming lender.
"It’s down to whether other institutions want to keep a presence in a market which is not currently functioning.”
Attitude a key factor
So for securitising lenders, short-term attitudes might be slightly pessimistic.
However, Mark Charlesworth, head of mortgages at Citi, said it wanted to use the current market to build up its presence in the UK.
“The situation, as I see it, is that it depends on which part of the bank owns the UK lender. The likes of Merrill and Morgan Stanley are traders – setting up a front-end business and then selling or trading the pools.
"We’re different as we’re part of the consumer bank, not capital markets, so we are looking to hold onto our assets on balance sheet and see the current market as an advantage.”
Attitude is the key factor driving decisions in the current market. But looking at the fact that only Morgan Stanley has reacted so far, contradicting Sismey-Durrant’s statement that US lenders were prone to the jitters, does this mean that most lenders will stick it out for the long haul?
The fact that Citi seems so positive, while other factors such as Goldman Sachs acquiring Money Partners and GE Money moving its headquarters to London would seem to affirm this belief.
However, as Charlesworth points out, they won’t wait around forever.
“The securitisation market has dried up so it’s up to all of them to decide how long the market will be disconnected. Morgan Stanley is not a precursor for everyone leaving but how long are they prepared to incur the costs without the revenues?”
And that is the question that only the individual banks can answer. We are just going to have to wait a little bit longer to hear their final response.
