The Council of Mortgage Lenders has drawn up a blueprint to address the funding problems in the mortgage market.
The trade body says the idea, which has already been submitted to Sir James Crosby’s review into housing finance and to the Treasury, is an innovative approach which helps the financial system to help itself.
The CML believes it could help to significantly reduce the severity of the downturn in the housing market.
The CML is disappointed by speculation this week that the Crosby review is unlikely to offer policy recommendations in its interim report.
The proposals it makes include the creation of a gold standard for residential mortgage-backed securities, which would involve a standardised securitisation structure, with minimum asset quality requirements but without a government guarantee.
The CML also proposes the creation of a mortgage funding entity with explicit or implicit government support.
The trade body also believes there should be government provision of a guarantee on lenders’ RMBS and covered bond issues for a period of time until the market returns to normal.
It also believes a secured lending facility should be made available in addition to the Bank of England’s special auctions and the Special Liquidity Scheme.
The collateral would be new UK RMBS or covered bonds CBs.
To qualify, the RMBS or covered bonds would first have to be sold to investors in a public issue.
This is of crucial importance, as it would ensure that the market itself is essentially delivering the solution, with the secured lending facility simply acting as a catalyst to restore market confidence.
The investors would take the credit risk in the usual way, but the lending facility would give them confidence and so help to break the current vicious circle.
This differs significantly from the BoE’s SLS.
First, it is specifically targeted at new RMBS and CBs, which are excluded from the SLS if they contain mortgages originated after December 2007, and hence allows the likelihood of a greater flow of funds directly back to support new mortgage lending.
Second, and more importantly, it specifically galvanises investors back into the market in a way that the SLS does not.
The CML says that with quick and decisive implementation of the mortgage market funding proposal, the government could mitigate the difficulties that borrowers and the housing market will otherwise face.
It is essentially a way of kickstarting the markets for UK RMBS and covered bonds back into life, the CML says.
These are parts of the market that have been dysfunctional since investor appetite disappeared in the wake of the credit crunch.
Their loss has been the main cause of the contraction in the size of the mortgage market, and hence the lack of mortgage availability for many borrowers and higher mortgage costs.
Mortgage lending is set to halve this year, with many borrowers who could afford new mortgages nevertheless being unable to access funds.
Michael Coogan, director-general of the CML, says: “If the government acts quickly, there is a window of opportunity here for the government and the BoE to break the logjam in the housing and mortgage markets and underpin confidence in the financial system.
“The single biggest issue in the housing market that the authorities need to address is the lack of available funding to support new mortgage lending.”
He adds: “This proposal has the virtue of being delivered through the market itself. Unlike a government guarantee, the investor keeps the credit risk.
“But it specifically incentivises investors, which the special liquidity scheme does not. And it can be implemented quickly, in an environment where speed is of the essence.
“A year into the credit crunch, there is no merit at all in waiting until the autumn before taking steps that will help the housing market to remain more resilient, and so help the overall health and stability of the UK economy.”
Filed under: Economy, Mortgage News, Mortgages, Property | Tagged: credit crunch, liquidity, mortgage market, wholesale markets
