1. ‘A Bumpy Ride’ Tony Ward, CEO, Home Funding Ltd

2. 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

3. Quick recap and what happened?  US Credit Crunch  Cross contaminated into UK and rest of Europe  Became a Liquidity Squeeze

4. 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

5. Threats to economic stability  CPI  GDP  Bank Rate  Employment/Unemployment  House Prices  Role of press  But most importantly, Consumer Confidence

6. 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?

7. 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

8. Conclusion  Investors are fearful  So new equity finance becomes both elusive and expensive

9. Will the UK RMBS market recover?  Yes because:- For investors:  Stable ratings through time  Large amount of data available to assess risks and returns  Attractive returns on capital for bank investors  Attractive way for investors to get mortgage risk without a mortgage infrastructure  UK securitisations are still performing well – no defaults or losses in any major issue…. so what’s the problem?

10. Will the UK RMBS market recover? continued/…. For issuers:  Diversification of funding  Funding to maturity  Capital efficient  Ability 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…

11. 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

12. What’s good…  That the problems have been highlighted and got appropriate press cover  The first two recommendations!

13. And what’s not…  Timing. Delay in doing nothing!  Extension of liquidity scheme may help but doesn’t go far enough

14. 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?

15. 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

16. 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

17. 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!

18. 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