The worst of the credit crunch might have passed, but to expect improvement in the mortgage markets is to overlook the changes that the crisis has wrought.
Last month, the Bank of England became the first key financial institution to voice cautious optimism about the outlook for financial markets, saying some mortgage securities now look cheap. Unfortunately, this optimism about the capital markets does not translate directly to the mortgage industry.
As the Bank of England talks of cheap assets, UK building societies such as Nationwide continue to remove mortgage products from offer. The credit crisis has left lenders with weakened balance sheets, wary of risky lenders and without ready wholesale funding. None of these problems can be rectified quickly.
Meanwhile, with the tap of cheap credit switched off, housing demand becomes impotent. The dip in home prices in the UK looks like the beginning of a lengthy slide, while the US slump continues to deepen. The decision of the UK's biggest lender, HBOS, to raise £4 billion through a rights issue in April belies the lender's worries about the state of the housing market.
For investment banks that have moved aggressively into mortgage origination over the past two to three years, these fundamental changes are demanding a change of policy. Our cover story looks at how Deutsche Bank is responding to the challenge in the US, switching much of its attention to cross-border lending to buyers of second homes.
It is a small market but one with great potential. There is much difference between lending to subprime borrowers in California and holiday-home buyers in Cost Rica, but the latter could bring welcome (if limited) respite while home mortgage markets tread the slow path back to normality.
- Rob Mannix, editor.
The week on Risk.net, July 7-13, 2018Receive this by email