Research from the mortgage servicing firm shows newly originated mortgages can produce yields of 6% and above whereas 2007 vintage mortgages yield considerably less, and as low as 2.5% in many cases.
Exact added that it is more efficient for banks with mortgages in run-off to shrink these assets proactively than to hold on to them for term. Run-off books can be shrunk quickly and cost-effectively by giving borrowers a cash allowance to encourage them to refinance their mortgage elsewhere.
As institutions aided by the UK government manage most of these run-off assets, the taxpayers are bearing the brunt of this. Using widely accepted yield analysis, Exact said the value of these portfolios is less than 80% of their face value, representing a £30bn value decline for these institutions and taxpayers.
Some borrowers will still be unable to refinance even with a large discount and institutions should protect the value of these mortgages by using servicing techniques to stop them going into arrears.
The findings come out of Exact’s latest White Paper which explores the impact on businesses and the wider economy of inefficient mortgage books – and examines what banks can do to maximise the value and protect the downside risks in their run-off portfolios.
Malcolm Larmouth, head of business development of Exact, said, “Keeping mortgages in run-off denies the taxpayer the chance of getting a return on their investment. If these organisations are split and sold off, the profitable parts of the businesses will go into the hands of the private sector while the inefficient and costly elements – such as these inefficient run-off mortgages – will remain under public ownership. “
