There are three rules in the mortgage markets nowadays - valuation, valuation, valuation. And while it might seem trite to appropriate a property cliche for the mortgage industry, the issue is not nearly as straightforward.
At the most basic level is the question of whether the mortgage markets have finally bottomed out and if beleaguered portfolios have been re-priced to levels low enough to attract investors. Some of the biggest asset management firms in the world, such as New York-based BlackRock and California's Pacific Investment Management Company think so, with major investments announced in May (see The Good, the bad and the ugly, page 6).
For those left stranded with bad loans on their books, the issue of when the loans might repay, and how, is crucial to their understanding of value. And the issue of repayment is open to interpretation. Some believe it is a matter of assessing credit - no easy feat (see page 5). Others are more interested in understanding default rates and determining cash flows (see Show me the money, page 17). And there are those who think it is a combination of the two (see Solid as a rock, page 13).
Central to it all, of course, is the broader issue of risk management. And there are major questions being asked of the risk management industry. Is it really necessary to have so much complex, quantitative analysis to understand risk? Moreover, doesn't the difficult maths make it hard to see the wood for the trees - duping the business decision-makers into believing they are safe when anyone using simple common sense can see the dangers ahead (see Vicious Circles, page 30)?
And then there is the issue of putting the risk managers in charge. One might easily argue that, in these trying times, it is those that made less money during the subprime bull run who have best maximised returns for their shareholders. In that sense then, making less money can mean being more profitable. Surely, as much power should be given to those that know how to apply the brakes and when, as it is to those who see a profitable opportunity and pursue it? (see Internal affairs, page 22).
William Rhode, editor.