Out with the old, in with the new

Many of you probably wished at New Year that 2008 would be better and more profitable than 2007 - while also hoping that investors wouldn't resolve to steer clear of mortgage-related securities or bonds.

The year has begun on a negative note: a major mortgage acquisition fell through as global asset manager Blackstone Group and General Electric terminated their agreement to buy mortgage and leasing business PHH. Blackstone said it was willing to close the deal but the banks backing the transaction were now unwilling to provide financing under the terms originally agreed.

The following day, US bank National City Corporation announced it was cutting its dividend by nearly half and closing its wholesale mortgage division, with the loss of 900 jobs, due to the weakened housing and credit markets.

On the same day, the Federal Reserve offered a glimmer of hope - its latest minutes revealed it may cut rates in coming months. But if the Fed is considering action, it must believe things could get worse or, at best, remain dormant. It warned that the US housing crisis is worse than first anticipated and the market correction will be more severe than previously forecast.

However, the Fed also said it would increase rates if markets improve. Just how quickly is unclear - but we can only hope the industry is allowed to catch its breath before any rate rises. Opinion may be divided on which is the lesser evil - rate reductions in a challenging market or rate rises just as the market shows signs of calming.

Whatever strategies the central banks, regulators, lenders and investments banks follow in 2008, it will be a year of picking up the pieces and analysing positions. This month, Mortgage Risk and industry experts give their predictions: mezzanine CDOs and structured investment vehicles may well disappear; UK house prices will fall by 10%; Spain will face its own housing struggles; but fears of a recession will be unfounded.

These are just a few of the outcomes foreseen by our panel. But perhaps the most worrying prospect facing mortgage banks is that they may have to start again from scratch. For some of them, business models, funding models and lending decisions will need to be overhauled. The UK's Financial Services Authority (FSA) said in December that lenders should be testing whether their businesses could withstand severe market volatility and considering what credit stresses would take them to the "point of destruction". The losers should ensure they depart the marketplace in an orderly fashion, the FSA said. But for the winning majority, 2008 could be an ideal time to seek new opportunities while the market sleeps.

Dippy Singh, managing editor.