Taxpayers' cash may kick-start mortgage market

29 July 2008
The Treasury has ruled out setting up an US-style government-backed lender to kick-start the UK’s flagging mortgage market, but has hinted that it may allow banks to swap mortgage debt for taxpayer guaranteed bonds.

Sir James Crosby, the former head of HBOS who was commissioned by chancellor Alistair Darling back in April to investigate how mortgage lenders can best cope with the shortage of funding caused by the credit crunch, has today reported on findings, predicting that the credit crunch will continue its grip on mortgage lending until the end of 2010.

Although it was widely hoped that Crosby would recommend the government take action to kick-start the mortgage market again, the report largely suggests that the funding of new mortgages should continue to be left to the market. By recommending no action, the report accepts that the problems with the mortgage market will continue, possibly until the end of 2010.

The credit crunch’s impact on the mortgage market is the result of a lack of funding for new loans. Although many lenders use retail deposits to fund lending, others partly rely on the securitisation market, which allows them to sell mortgage debt to investors. However, a lack of confidence in the UK banking system, and specifically the mortgage market, has resulted in investors turning their backs on securitised deals.

Crosby, in his report, admits that the recovery of the mortgage sector can only be achieved by the re-awakening of the securitisation market. However, he refuses to make any specific recommendations about how the government can help.

One option outlined in the report is the government issuing a guarantee on high quality mortgage debt, so the risk is transferred from investors to the government.

Crosby says: “This would be likely to support increased market activity in the near term, though the extent of the impact on net new mortgage lending is less clear.”

However, the proposal is likely to cause controversy as it could put taxpayers money at risk.

Crosby will now consult on and evaluate the options available to the government and is expected publish his conclusions this autumn before the pre-Budget report.

“I may yet recommend that the government should not intervene in the market, on the grounds that such intervention would create more problems than it would solve,” Crosby warns. “But a significant and prolonged shortage of mortgage finance will take its toll on both the housing market and consumer spending.”

Fannie Mae and Freddie Mac, the two largest mortgage lenders in the US, were set up as government agencies. But Crosby believes this would not be an appropriate model for the UK to adopt.

"Much has been said about the case for launching a US-style agency but it seems unlikely that it would be right to tackle this century's problems with last century's solution, particularly given the time it would take to create any such agency," the report said.

The Council of Mortgage Lenders (CML) says it is now imperative that the Treasury take action to help re-start the mortgage market - as, even if the measures proposed are implemented in the autumn, they will still take some time to have an positive impact.

Michael Coogan, director general of the CML, says: “As the Bank of England lending figures [see below] show, the mortgage market remains severely constrained. In aggregate, lenders are unable to meet the consumer demand for mortgages because there is not enough funding available to them.

“Without action, the situation in the housing market will be worse than it needs to be. The housing correction will overshoot, and the knock-on effects on the wider economy will be significant.

Mortgage lending falls

The gloomy message comes as figures reveal that mortgage lending has fallen to the lowest level since October 2000, as the credit crunch has forced mortgage lenders to toughen up their lending criteria.

According to the Bank of England, a total of £3.1 billion was lent in June – well below the £9.9 billion seen in June 2007. The central bank’s figures are echoed by the Building Societies Association, which show that building societies only lent £3.4 billion in the first six months of the year compared with £8.4 billion in the same period last year.

In addition mortgage approvals have also fallen - with only just 165,000 new loans agreed during June, down from the 214,000 approved three months earlier.

Howard Archer, chief UK and European economist at Global Insight, says: “Very low mortgage activity suggests that house prices will continue to fall sharply over the next couple of years.

“It seems unlikely that the Bank of England will cut interest rates in the near future, and it is very possible that the Bank of England's next move could be to raise interest rates, which would clearly be very bad news for the housing market.”

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