“In the early years of this century, mortgage-backed securities markets grew very rapidly and
became a very important source of funding for UK mortgage lenders. So much so that by 2006
such funding equated to around two thirds of net new mortgage lending in the UK. By the end of
2007 the total amount outstanding of UK mortgage-backed securities was £257bn as compared
with total residential mortgages of £1200bn. Investors in such securities were principally attracted
by their liquidity and intrinsically low risk of default and years of unprecedented innovation in
financial markets and apparently rapidly increasing liquidity resulted in explosive growth in
demand. The major investors were banks, their off balance sheet vehicles and money market
funds. By far the greatest demand came from outside the UK.
In July 2007, when credit markets faced a sudden and significant re-pricing of risk, new issuance in
these markets came to an abrupt halt. One year later, trading in the secondary markets continues
to be on much wider interest rate spreads than was hitherto the case. In time these markets will
stage some sort of recovery but I am firmly of the opinion that in the foreseeable future, there
will be very little new issuance of UK mortgage-backed securities.”

Mortgage markets are adjusting to the shortage of funding. Lenders are seeking to re-price
existing mortgages but this is a slow process which will take two or three years to run its course.
This will itself cause an increase in defaults, which are in any case on the increase, if from
historically low levels. In time however, I expect that the increase in prices will more than
compensate banks for higher credit losses. In the meantime, it is hard to see why banks will
increase their currently depressed appetites for risk. While there is still good availability of finance
for those borrowers who offer significant security (i.e. have reliable earnings and seek to borrow
75 per cent or less of the value of their property), the availability of finance to all other
consumers is considerably reduced and likely to remain so.”

“The amount of RMBS and covered bonds maturing in each year from 2008 to
2010 is estimated at around £40bn (Table 4.1), although this is very difficult to
determine with any precision. In context, this figure would equate to around 5 per cent
of the stock of UK banks’ interbank liabilities at end-2007, and more than two thirds of
the net new mortgage lending projected by the Council of Mortgage Lenders in 2008.”

Northern Rock had problems with rolling its securitisations.

Report has some good stuff… and topically looks at European covered bonds market.

In banking and economic policymaking, as in many of life’s ventures, there is an eternal conflict between short- and long-term benefits. It seems that the Greenspan/Bermanke bubbles and their ‘remedies’ so far have gone reflexively for short-term results at the manifest expense of the long term.

This may be a free country, but The Big Picture is my personal fiefdom. I rule over all as benevolent dictator/philospher king/utility infielder. Fear my wrath, mortals!

Right now, someone is reading this and saying to themselves “What does he mean, being an asshole?” If you wondered that to yourself, well the odds strongly favor that you yourself have sphincter-like qualities. Thus, you should consider it likely that you will be banned as a rectoid from posting comments sometime in the near future.