Wednesday, January 23, 2008

No room for movement and no easy way out

King fails to soothe lenders

Turning loans into bonds and selling them to raise funds has become a linchpin of the UK mortgage industry, but since August banks have found it almost impossible to sell any such retail mortgage-backed securities because of the crisis in the money markets. -There is a risk, if house prices fall, of a vicious cycle developing with declining collateral values leading lenders to tighten credit further, some economists say. -“The only thing that really stops that is if the Bank of England steps in – but the Bank will say they don’t set rates to keep mortgage lenders happy,” said Alan Castle at Lehman Brothers.

Posted by andrew @ 11:40 AM (638 views)
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3 thoughts on “No room for movement and no easy way out

  • Quite. Who does GB expect to buy these NR bonds? And what price will he sell them at in order to get them off his books?

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  • NR bonds will be bought because they will be guaranteed (interest and principal)by HMG and will yeild more than conventional Gilts for the same maturities. I understand the NR bonds will be 5 years. The bonds themselves are “secured” by the asset pool. In other words they are based on the mortgages themselves. As you rightly say Cornish this is gonna cost but the real problem is what happens when they mature and / if the asset pool is (as we believe) reduced in value by defaults (either at maturity or in the interim) . The government is including Mortgages that are larger than the face value of the bonds, so the risk of default is first bourne by NR themselves. Should they be involved in this risk – probably not. If they had done nothing and let NR go what would have happened? Probably a run on the banking system. Banks are NOT normal companies you cant just let them go under as there are repercussions!

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