With the liquidity squeeze showing no signs of disappearing there are strong fears this will lead to an arrears crisis.
Lenders need to restore confidence and start expanding their product ranges again. An article published recently showed that 23000 mortgage products have been withdrawn by lenders in the last 6 months from mortgage sourcing software programmes. This shows the extent of the problems mortgage and remortgage clients are facing at present.
However, there are two sides to every coin and lenders would like nothing better than to lend but neither affordable funding nor the means to sell on specialist (sub prime) assets exist in the current market. Lenders can not conjure up a market for mortgage assets out of thin air.
As borrowers 2 & 3 year fixed rates expire in 2008 and early 2009 they will revert to their lenders standard variable rate which is much higher. If they cannot refinance, the higher mortgage payments could lead to arrears.
Unless the market opens up again and lenders can expand their products ranges, clients will struggle. Where this will lead is hard to predict, but if asset performance worsens it will only serve to further delay the recovery of the securitisation market as liquidity-shy investors will be in no rush to invest in poorly performing assets.
However the game unfolds it is difficult to see a way out of the current situation without fresh liquidity being injected into the industry.