‘A Bumpy Ride’

Tony Ward, CEO, Home Funding Ltd

What I’m going to talk about Quick recap - what happened and where we are now

Threats to economic stability

The Capital Markets – Prolonged Agony

Why this is the case and why the UK is vulnerable

Can (and when will) the securitisation market recover?

The Crosby report – What’s good and what isn’t

What can be done and other ideas

Future predictions/Conclusion

Quick recap and what happened? US Credit Crunch

Cross contaminated into UK and rest of Europe

Became a Liquidity Squeeze

Where we are now

Not in a good place Certainly not out of the woods Effects working through to all economic indicators Extreme shortage of liquidity for lending – major problem Downward spiral leading lenders to pull back on volume, withdraw

from market

‘I think the financial crisis is at a halfway point. Perhaps …I would even go so far as to say the worst is yet to come’: Kenneth Rogoff, former chief economist, IMF

Threats to economic stability

CPI GDP Bank Rate Employment/Unemployment House Prices Role of press But most importantly, Consumer Confidence

The Capital Markets – Prolonged Agony

Likely that flow of readily available finance will be severely curtailed for many months more

US moves to shore up Fannie Mae and Freddie Mac will help there

Impact of Henry Paulson proposal in restoring confidence?

Britain is vulnerable to protracted squeeze and no solutions here thus far

Why is this the case?

Just a few issues… UK is the largest user of securitization and capital markets outside

of the US Main investors in Retail Mortgage Backed Securities (RMBS) and

Covered Bonds have been banks and hedge funds Hedge funds are largely out of the market IMF have underlined a further wave of serious bank losses in US –

downward spiral where new losses lead to tighter lending conditions Huge uncertainties exist over scale of eventual losses leading

Banks to be wary of investing in risky asset classes Mark-to-Market has a lot to answer for here…… Banks have overstretched themselves by lending too much against

too small a foundation of capital. Result: struggle to raise extra capital

Derivatives and Synthetics have added volatility

Conclusion

Investors are fearful

So new equity finance becomes both elusive and expensive

Will the UK RMBS market recover?

Yes because:-For investors:Stable ratings through timeLarge amount of data available to assess risks and

returnsAttractive returns on capital for bank investorsAttractive way for investors to get mortgage risk

without a mortgage infrastructureUK securitisations are still performing well – no

defaults or losses in any major issue…. so what’s the problem?

Will the UK RMBS market recover? continued/….

For issuers:Diversification of funding Funding to maturityCapital efficientAbility to fund all types of asset from prime to “toxic

waste” – which is why Gold Standard mortgages not a sensible idea!

But when? Many, many months, even years…

Steps to improved the situation – The Crosby Report

3 recommendations:

Extend Bank of England scheme and allow mortgage lenders to swap RMBS for new home loans

Introduce a temporary Government guarantee for high quality backed securities

Do nothing on the basis that intervention would create and prolong a problem

What’s good…

That the problems have been highlighted and got appropriate press cover

The first two recommendations!

And what’s not…

Timing. Delay in doing nothing!

Extension of liquidity scheme may help but doesn’t go far enough

What else can be done?

Bank of England must reject any case for a rise in interest rates and look at reducing them as soon as inflationary pressures recede (early 2009?)

Relaxation of mark-to-market accountancy rules – my personal crusade!

No buck passing - continual involvement of Bank of England/Govt

Consultation and coordination with all relevant trade bodies

Or something else?

Other ideas

Create a Super “AAA” class of note guaranteed by the Bank of England and eligible for discount with the Bank

Widespread, permanent and market value based Bank of England eligibility for RMBS assets

UK or EU agency for purchase and subsequent issuance of approved collateral

Ability for retail investors to invest in RMBS with lower minimum investment collateral

Future Predictions Lending volumes will continue to decline in 2008. Estimated gross

lending for year £240bn?

Arrears and repossession levels to rise dramatically

Consolidation in the markets

Exit of more lenders

Further tightening of criteria/ less emphasis on ‘price wars’

But the birth of a new opportunity – investors in mortgage pools

Conclusion It’s a rocky road More bad news to come from US ? Perceived (and real) risk of contagion – HBOS example Talk of ‘technical’ recession in UK – zero growth But maybe the UK is being compared unfairly with Europe Inflation risks are rising across Europe – little room for further rate cuts Base Rate/LIBOR differentials - markets remain nervous and basis risk

is still high and expensive to hedge Not confident we will get a UK BBR rate cut this year – Spring 2009? Securitisation/Covered Bond markets remain extremely difficult.

Markets may not operate now until 2010/2011 Return of consumer/investor confidence is everything!

What does the future hold for mortgage brokers?

Next couple of years will remain challenging for lenders and intermediaries

Need to build blueprint for the future Consolidate/Cut costs Think of other ways of raising income (annuity?) Build longer term partnerships But not all bad news Arguably now more than at any other time, borrowers need

good brokers

‘The Credit Crunch is creating a new world order in banking and finance’ – Robert Peston, BBC Business Editor