Mortgages: Action to kick-start housing market
Tuesday 25 November 2008
The Chancellor said yesterday that the Government was willing to provide guarantees on bonds backed by mortgages to get the market for new home loans moving again.
Alistair Darling said he accepted the key recommendation of the Crosby report into mortgage finance and that the Government would work to come up with a plan that met EU state aid requirements and complemented the Government's credit guarantee scheme for banks. In his report, Sir James Crosby, the former chief executive of HBOS, said government intervention was needed to unblock mortgage finance markets frozen by the collapse of confidence in the housing market and mortgage-backed bonds.
Sir James urged the Government to guarantee £100bn of mortgage-backed securities over the next two years. The Government would auction guarantees that would be attached by lenders to blocks of AAA-rated mortgage-backed securities issued to fund new lending. Lenders would retain the credit risk and would have to hold capital against the loans and would pay the Government a rate of interest for the guarantee according to the amount arrived at in the auction.
The guarantees would only cover mortgages for changes of ownership. Sir James argued that the likelihood of losses on AAA-rated mortgage-backed securities was "comparatively remote". "In a market starved of confidence the proposal therefore amounts to the Government charging for access to the confidence that attaches to its credit rating," he said. "Such intervention should ensure that a cyclical correction in the housing market does not turn into something much more serious with all that would ultimately imply for the wider economy."
Britain's banks massively increased their lending at cheap prices during the credit boom by drawing in funding from investors to replace traditional deposits. They gained much of this funding by parcelling up their own mortgages into bonds for sale to investors.
UK residential mortgage-backed securities ballooned from £13bn in 2000 to £257bn last year but investor appetite for these bonds collapsed in August 2007 as defaults rocketed on US sub-prime mortgages. Sir James said UK banks' mortgage lending would be hampered by their inability to replace £160bn of redemptions on mortgage-backed securities in the market between now and 2010.
Mr Darling said: "We will proceed to work up a detailed scheme based on [Sir James's] recommendations and seek state aid approval to proceed." Mr Darling said that he would report back by the Budget.
The Council of Mortgage Lenders (CML) said: "The CML urges the Government to proceed as quickly as possible in seeking the necessary permissions to proceed."
Brown on Brown: I'm in for a long cold winter
Jill Brown, 67, lives in Salisbury and suffers from a neuro-muscular disease that leaves her wheelchair-bound. She receives a pension of £200 a month from her time working in the NHS as a physiotherapist and gets a disability living allowance.
"The rising cost of living has been particularly hard this year and I know all low-income pensioners like me were watching what the Government has to say very closely. Ordinary household items, food, petrol and fuel have all shot up and there has been no equivalent rise in pensions or allowances for disabled people.
"I do get help with the fuel bills through the winter fuel allowance, but I find it only really covers a few weeks either side of Christmas. I get cold very easily and with the fuel bills going sky-high this year I'm in for a long cold winter.
"The extra £60 one-off payment will be most welcome. The cut in VAT might help a little bit with the food bills, but it's not going to encourage me to go out spending. As for the pension increase of £5 a week, it's hardly much is it? All it takes is for the council to put up council tax and that's wiped out in an instant.
"What does worry me is how we are going to pay for all this borrowing in the future."
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