Opinion Former Article

CML urges Treasury to adopt innovative funding solution

The Council of Mortgage Lenders has drawn up a blueprint to address the funding problems in the mortgage market. The idea, which has already been submitted to the Crosby review team and to the Treasury, is an innovative approach which helps the financial system to help itself. It could help to significantly reduce the severity of the downturn in the housing market.

But speed is of the essence. The CML was disappointed by speculation this week that the Crosby review of housing finance was unlikely to offer policy recommendations in its interim report. The CML firmly believes that with quick and decisive implementation of the mortgage market funding proposal, the Government could mitigate the difficulties that households and the housing market will otherwise face, as well as helping to restore greater confidence to the financial system as a whole.

The suggested action plan is outlined in detail in section 5 of the attached document and is represented visually in the attached diagram. It is essentially a way of kick-starting the markets for UK residential mortgage-backed securities (RMBS) and covered bonds (CBs) back into life. 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.

The plan would involve the Bank of England offering a repo facility (essentially a form of secured lending), using as collateral new UK residential mortgage backed securities (RMBS) or covered bonds (CBs). To qualify, the RMBS or CBs 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 repo facility simply acting as a catalyst to restore market confidence. The investors would take the credit risk in the usual way. But the repo facility would give them confidence, and so help to break the current vicious circle.

This differs significantly from the Bank of England's special liquidity scheme (SLS) and other BoE facilities in two ways. 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. This is important as a step back towards self-sufficiency in the mortgage securities markets.

CML Director General Michael Coogan said:

"If they act quickly, there is a window of opportunity here for the Government and the Bank of England 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.

"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."

NOTES TO EDITORS

1. The Council of Mortgage Lenders' members are banks, building societies and other lenders who together undertake around 98% of all residential mortgage lending in the UK. There are 11.8 million mortgages in the UK, with loans worth over £1.2 trillion.

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