The U.K. Council of Mortgage Lenders' (CML) hopes of kick-starting the U.K. RMBS and covered bond markets have been quashed before they ever got off the ground, although they have at least challenged the notion that some solution must be implemented to get U.K. mortgage lending going again.
CML warned last month that the Bank of England's special liquidity scheme (SLS) has not helped banks raise the necessary funding to reawaken the mortgage market and said the government needed to act immediately to improve the situation before it deteriorated further.
The council proposed a plan to reduce the current crisis's negative impact on U.K. mortgage lenders and fight the lack of wholesale funding in the mortgage market.
The CML also suggested that the government guarantee packages of loans and the Bank of England would then offer a secured lending facility for banks where MBS can be used as collateral. The proposal aimed to provide a securitization market for mortgages originated since 2008 that were otherwise excluded from the Bank of England's SLS and thereby indirectly stimulate mortgage lending activity.
The main part of the proposal was that a repo facility be allocated to newly originated RMBS and covered bonds. UniCredit Markets and Investment Banking analysts explained that typically not all investors are able to take advantage of repo agreements, which is why the CML also suggested broadening the range of parties eligible for repos with the Bank of England.
To qualify, RMBS or covered bonds would first have to be publicly placed with third-party investors. The investors would take the credit risk in the usual way, but the repo facility would give them the confidence that is so lacking in the current market situation.
But the interim report on the mortgage finance markets that was commissioned by the U.K. Treasury and authored by Sir James Crosby, the former chief executive of HBOS, concluded that setting up U.K. equivalents of Fannie Mae and Freddie Mac will not be the answer for reviving the mortgage securitization market.
"Much has been said about the case for launching a U.S.-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,'' Crosby said in his report.
The problem is that while Crosby is right in determining that there is no easy solution to the current situation, he's offered very little in his report in terms of a contemporary solution to the wholesale funding problem. Without a fix in sight, he is essentially agreeing that the mortgage lending glut will continue for at least the next few months, and in some estimates the glut could continue over a three-year period.
The British Bankers Association recently reported that the situation has led lenders to an unprecedented reduction in mortgage deals, with the number of new home loans issued by high street banks and building societies falling to an all-time low of 21,000 in June.
"As the Bank of England's lending figures today show, the mortgage market remains severely constrained," said Michael Coogan, director general at CML. "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."
This shortage of mortgage funding will persist for years without intervention.
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