In his article, Cleary says (and I paraphrase): ‘I’m still gnashing my teeth about the doom and gloom preachers...in my opinion, predicting a non-conforming crash in the UK is simply unjustified’. He goes on to explain convincingly why the UK market is fundamentally different to its US counterpart. But we know this already, and few of us need further persuasion.
The issue of concern for most, however, is collateral damage from the US, rather than a direct replication of its problems. It is here that the ‘doom-mongers’ have a point, as UK investors increasingly exhibit a growing nervousness and a general ‘flight to quality’.
This is important because investors’ appetite for mortgage-backed securitisations has provided the liquidity to allow the specialist sector to innovate and flourish. Any weakening in this, or a hardening in the entry prices investors are prepared to pay, will inevitably feed through to the mortgage originators. At best this will impact lenders’ margins, and put further pressure on pay rates, and arrangement fees – or at worst, create a rash of unsubscribed securitisation offerings. Neither would be good, but there’s no point denying what is an increasingly obvious fact.
The reason we’re where we are is equally obvious but not directly the fault of specialist lenders in the UK. The blame can be laid at the door of inadequately controlled and supervised lending in the US, and a highly complex process, where debt is syndicated across a wide spread of institutional investors. While this has certainly diluted the risk for any single investor, it has exposed all involved to contagion. Now the chickens have come home to roost – those same investors are, unsurprisingly, reassessing their exposure elsewhere, particularly where it includes higher risk assets, such as non-conforming mortgages, or high-risk activities.
The $64,000 question is whether this is a blip or representative of a long-term crunch in the credit markets. I don’t know the answer but there are hopeful signs that it could be the former. Liquidity is healthy and institutional investors don’t like sitting on under-employed cash for long. The global economy, which through the rise of China and India is not so dependant on the US, appears robust enough to withstand the current nerves. If I’m right, and it’s a big ‘if’, investors will be back sooner rather than later. But the rules will have changed along with their once seemingly insatiable appetite for riskier opportunities. Originators will need to adapt accordingly.
For the UK to avoid the problems in the US, there needs to be several factors in place: a strong economy and housing market; stable interest rates; innovative but proportionate product design; responsible underwriting; and robust but flexible regulation. I believe we’re close to this, but it will serve us well to remember that perception and sentiment play a part in determining where investors put their cash.
So it isn’t about doom-mongering. It’s a case of recognising the facts, making an objective appraisal of them, and putting in place measures to mitigate their damaging effect. I’m afraid that comforting words alone are not enough if we want to maintain the vibrant market of recent years. I certainly share Cleary’s desire for that.
Yours sincerely,
Bob Sturges
Director of communications
Money Partners
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