The mortgage industry reacted sceptically yesterday to the Chancellor's proposals for reviving the securitisation market and encouraging the growth of long-term fixed rate loans.
Alistair Darling announced that he would set up a working group to develop a "gold standard" securitisation market to give lenders a reliable source of funding from a broader investor base. The group, consisting of representatives from the tripartite authorities and mortgage and investment industries, will report to him in the summer.
Mr Darling invited views on how to encourage more affordable long-term fixed-rate mortgages to reduce the risk of economic instability from people taking short-term deals that leave them exposed to rate rises. The Financial Services Authority has warned that more than a million mortgage customers face bigger bills this year as they come off short-term deals because rates have been forced up.
The Treasury said it would look at markets in other countries and signalled that it was more open to a version of the US's state-sponsored mortgage finance companies, Fannie Mae and Freddie Mac, though it remains to be convinced.
The industry welcomed the legislation to encourage the market for covered bonds, which are backed not just by the mortgages but by the financial institutions issuing the securities. The bonds are now regulated, which will attract European investors, and require less capital.
But the Council of Mortgage Lenders warned that the gold standard could lead to a two-tier securitisation market that would see bonds lacking the Kitemark "blighted". That could mean increased charges for borrowers who did not meet the criteria for the gold standard.
"The problems in the wholesale funding markets are still there and nothing concrete is being proposed to restore liquidity to them," a CML spokesman said. "But it is better to be in that position than to get something that could be more damaging."
The Government has been trying to encourage a market for mortgages of up to 25 years for a long time and critics said there was little new in the proposals. In 2003 the Treasury commissioned the economist Professor David Miles to analyse why fixed-rate mortgages were unpopular compared with other countries.
One of the main reasons for lack of take-up has been that if interest rates fall, borrowers face big charges if they wanted to change product. Lenders imposed the charges because they had funded the mortgage using long-term finance.
In its Housing Finance Review, published yesterday, the Treasury rejected Professor Miles's proposal that the Government could issue derivatives that would hedge lenders against early repayment. It wants to create a market for investors to buy prepayment risk as part of a diversified portfolio to limit their risks.
The review said that countries where this happens, such as the US and Denmark, have markets that minimise other risks, including the danger of credit default. In the US, the government-sponsored agencies Freddie Mac and Fannie Mae provide implicit government guarantees that increase security for investors. But the Treasury noted that national mortgage markets were distinctive and had been shaped over many years.
An industry source said it would be hard to radically change the UK mortgage market, in which 80 per cent of loans were sold through independent financial advisers who relied on "churn" to generate fees. Choosing two or three-year fixed-rate loans is also a rational action that hedges against interest rate movements for consumers, the source added.
Results of both consultations will be presented the Pre-Budget Report.Reuse content