Outlook: America's long-term fixed-rate mortgages won't travel easily

David Miles, the academic commissioned by the Chancellor to find out why the market in long-term, fixed-rate mortgages is so under-developed in the UK, is only a month into the project but already he's sounding off. Professor Miles apparently finds it a "mystery" that the market isn't better developed, given the obvious attractions of long-term, fixed-rate deals, but reckons he can do something about it.

David Miles, the academic commissioned by the Chancellor to find out why the market in long-term, fixed-rate mortgages is so under-developed in the UK, is only a month into the project but already he's sounding off. Professor Miles apparently finds it a "mystery" that the market isn't better developed, given the obvious attractions of long-term, fixed-rate deals, but reckons he can do something about it.

I wish him luck because actually it is not a mystery at all. Let me explain why. The market for long-term, fixed-rate deals is best developed in Germany and America. Nobody in their right mind would want to replicate the German system, which is inflexible, subsidised, discriminatory and carries exceptionally high penalties for early redemption. As a result the market for re-mortgaging in Germany is very limited, while competition to provide mortgages is virtually non existent.

Professor Miles rightly thinks the American model, where long-term, fixed-rate mortgages can be easily obtained and are generally penalty free, a better one. But there are some key difficulties in introducing it here, nor is it apparent that there is any need for it. In America the mortgage provider will typically sell on the mortgage to one of the big mortgage agencies – Freddie Mac or Fannie Mae – which will then package them up, slice and dice them according to their risk and duration profile, and securitise them as bonds. Both agencies are implicitly underwritten by the US Federal Government, enabling them to borrow in the market at rates comparable with those on Treasury bonds.

I may be wrong, but I find it inconceivable that Gordon Brown, the British Chancellor, would be prepared to offer anything similar, as it would in effect amount to a government subsidy. The other element of the US market that would be difficult to replicate, at least in the short term, is the way the risk of early redemption in these mortgages is underwritten for a fee in the insurance market. British mortgage lenders have so far struggled to find a cheap way of mirroring these products, if only because there is no long-term experience of them and, therefore, no obvious way of assessing the risk.

But even assuming that in time such hedging devices could be inexpensively provided, I'm still not sure that there would be much of a market for long-term, fixed-rate mortgages. In the US, there has been a big switch out of long-term, fixed-rate mortgages, if only because short-term interest rates have become so much lower than long-term ones. Ten and 25-year fixes only really become attractive if long-term rates are significantly lower than short-term ones. As things stand, that's not true either in the US or the UK. In any case, the Chancellor should perhaps have more faith in his own macroeconomic management. If he really has abolished boom and bust, with inflation and interest rates on a permanently low footing, then there is no need for the long-term, fixed-rate mortgage anyway.

Co-op/MMIL

Carol Galley, once one of the City's most formidable fund managers, seems to have vanished without trace since the humiliation of her court appearance over the Unilever pension fund débâcle, but still the mismanagement of those years is making headlines. The Co-op pension fund yesterday became the latest former Mercury Asset Management client to settle out of court over past underperformance, this time for a rumoured £40m.

Merrill Lynch Investment Management (MLIM), which to its eternal regret is now the proud owner of MAM, reasonably insists that all these cases are about the past. Today, the situation is much improved. None the less, these legal actions are a continuing source of embarrassment to the Thundering Herd, which has got enough problems dating from the over-exuberance of the bubble already without being constantly reminded of how much it overpaid for MAM.

The detail of the Co-op case is said to be materially different from the Unilever one, which involved the fund management group breaching the "downside tolerance" level set to safeguard the pension fund's money. As it transpired, the money had been entrusted to a rogue fund manager who, left to his own devices, pursued an exceptionally high-risk investment strategy which failed to pay dividends.

It is impossible to know how much reputational damage these lawsuits have caused MMIL, or the wider fund management industry. It's all very well insisting that what's past is past and that today MMIL outperforms its benchmarks on the great bulk of its funds, but these cases are very much a part of the collapse in confidence that has assailed the City and the equity markets for the past three years. Carol Galley did exceptionally well for herself and her shareholders in selling MAM to Merrill Lynch at the top of the market for £3bn. It's only a shame she could not have done better for her clients.

My housing hell

I may have overreacted in describing the Office of Fair Trading's recently announced investigation of the housing market as unnecessary and unwarranted. Having just tried and failed to buy a house, I am now convinced beyond all doubt that the market needs a much higher degree of regulation to ensure fair play than it is currently subjected to.

I have no complaint with the estate agent, who in my case acted professionally and honourably throughout. It was with the firm of solicitors handling what was a probate sale where the problem lay. I shan't name them, because it's always impossible to prove one's suspicions in cases like these, but they know who they are.

My first offer was made through the estate agents a little below the asking price. The feedback seemed positive and I began to believe that I might have the highest offer on the table. Then all of a sudden it transpired that the solicitors had a private buyer lined up, who turned out to be one of their paying clients. Plainly the private buyer could always undercut me and still have the higher offer because he wouldn't be paying any estate agent's commission.

All the same, this was close to being the perfect house for me so I determined to outbid him despite my disadvantage. The detail needn't concern us, suffice it to say that despite repeatedly outbidding the private bidder, I always seemed to be on the back foot.

In the end, the solicitors rushed through an exchange with the private buyer at a price that was £20,000 lower than my bid and without bothering to ascertain whether I might be prepared to go even higher. Their excuse was that there was a risk of an adverse survey – this despite the fact that I had offered to exchange the moment they accepted my offer, with completion shortly afterwards.

This property was plainly never seriously on the market to me. I was used, the estate agents were used, and the beneficiaries of the will did not receive the best possible price for their inheritance. No market is perfect, but the abuse that goes on in the housing market has to be seen to be believed. In the stock market, there are a legion of different rules and regulations to prevent the sort of practices and backhanders that seem an everyday occurrence in the buying and selling of property.

Yet it is this latter market which is the more directly relevant to most ordinary people, not just because they are more likely to engage in it than directly in the stock market, but also because of the size of the sums involved. So I apologise to John Vickers, chairman of the Office of Fair Trading, for being so swift to condemn his investigation. Go to it is what I now say.

jeremy.warner@independent.co.uk