Consultant Zone

Vendor Due Diligence

An interesting development has been seen in the mortgage book trading scene over the past few months. Since 2007 there have been relatively few trades going on, but those that have, have been subjected to more intense scrutiny by purchasers, keen to know exactly what they are buying and how they are going to manage the individual loans that they are acquiring.

As a result there has been more focus on so called ‘due diligence’ exercises than there has been in the past. Buyers naturally want to avoid unnecessary costs ‘up front’, if they are unsuccessful in the acquisition of assets at the right price (for them.)

Some sellers, keen to re-assure about the quality of the assets they are considering selling, are therefore engaging in ‘vendor due diligence’ exercises, with the aim of independently verifying the mortgage portfolio data.

This has one particular advantage for potential purchasers, who can share the costs of the audit work with other (sometimes unknown) parties, thereby avoiding duplication of costs. It also effectively audits existing mortgage portfolios, ensuring that should all else fail, the holder of the assets can point to independent verification of data and detailed analysis and existing asset quality.

This will prove invaluable going forward as in the short term, regulators get to grips with the challenging issue of establishing what good or bad lending looks like and how to get lenders to ‘fess up’ to the quality of their own portfolios in the longer term, as the market recovers, brings an element of independent verification to the trading market, which has undoubtedly been lacking over the past decade.