Independent review and analysis

Mortgage books are selling above par – based on what?

Figures released recently by the CML show gross lending in Q2 of 2015 at £52.2billion which is a welcome boost for the industry.

The re-entry of investment banks and hedge funds providing funding lines to support the traditional savings model has resulted in mortgage lending levels being at their highest since 2008. Now further funding opportunities have arisen from the chancellor’s announcement earlier this year that to help pay down national debt, the government is to offload a large proportion of the mortgage books acquired during the crisis.

Many banks and holders of mortgage assets also report that the timing is now right to sell out of closed mortgage books and boost capital buffers, which in turn enables them to clean up their balance sheets.

From an audit perspective, the more rigorous underwriting checks which are now in place since the introduction of the Mortgage Market Review (MMR) gives funders piece of mind when funding the origination of new mortgage assets. The introduction of regular quarterly checks to ensure assets are being underwritten within guidelines and that data is accurately recorded is a positive move for them.

In comparison, seasoned mortgage assets where borrowers have enjoyed an unprecedented time of low interest rates, present a different challenge. Interestingly we are now seeing mortgage books selling above their “par” value. Purchasers of these assets make their own assessments of the value of the book and that includes some predictability on future performance against potential interest rate rises. However, stress testing does not necessarily assess borrower’s ability to pay; the real effect will not be known until we have reached that point and see how borrowers react.

So, with an interest rate rise on the horizon, fundamental knowledge of what type of borrowers make up a mortgage book becomes more important than ever. Any audit carried out on a mature portfolio should consider verifications of the capability and collateral issues on individual loans.

Finally, when funding new originations, having a bespoke audit plan to back up pricing mechanisms is essential.

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