Yesterday as part of his pre-budget speech, the Chancellor announced the findings of the long awaited Crosby report. As part of the next steps a detailed scheme needs to worked up and then approval obtained from the European Commission before it can be implemented, hopefully in the spring of 2009

Summary of the findings;

• “Without intervention, the market in mortgage-backed securities won’t return any time soon…”
• Banks cannot rely on strong savings inflows as a source of funding
• As a result competition between lenders is reducing and even ‘well capitalised banks’ are unlikely to return to normal lending volumes, resulting in a significant reduction in lending between 2008 – 2010

Crosby states that there is in his view a clear case for government intervention with -

“A large injection of funding into the banking system, delivered in a way that feeds directly through into mortgage lending and real activity in the housing market, would ameliorate the economic consequences of the shortage of mortgage finance and deliver tangible benefits to consumers.”

Overall three broad measures are suggested:-

• Greater standardisation and improved transparency of the asset-backed structures used in wholesale funding markets;
• Revisions of the recently adopted ‘mark to market’ international accounting conventions; or
• New initiatives from the Bank of England specifically designed to stimulate new net mortgage lending.

Whilst the first two initiatives are likely to bring longer term benefits and greater transparency they are unlikely to have an effect in the short to medium term. Accordingly Crosby states that
“Alternatives to direct government intervention won’t happen or won’t take effect sufficiently quickly…”

With regard to the last point Crosby states that -

“If the Government were to favour secondary intervention in the mortgage market, injecting some sort of Government guarantee into mortgage funding markets looks like the best option…”

“In order to ensure that the benefit of such cheap funding fed directly through to the housing market itself, banks would only be able to attach guarantees to new lending they had made in connection with housing transactions which involved a genuine change of ownership i.e. house moves, buy to let purchases and first time purchases but not remortgages (our emphasis). Certain types of mortgages (a small minority) would also be excluded; for example near ‘100 per cent LTV’ mortgages and loans to borrowers with seriously impaired credit records”

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• The guarantee is likely to apply to AAA RMBS securities only. These will in effect be ‘triple wrapped’ with the three levels of security, the deal, the issuer and then finally the government with the guarantee around the interest and the principal balance for the life of the notes
• It is suggested that £100Bn of guarantees are made available over 2009 and 2010 with these being auctioned by the government so that banks most in need of the guarantees to be able to issue can access them
• Gradually as the RMBS market recovers it is felt that banks would no longer need or be willing to pay for guarantees and the scheme would end
Our opinion

Checkmate believes that the introduction of this scheme at its earliest opportunity will provide a significant boost to the UK housing market at a time when it is most needed. As we have pointed out in earlier blogs, the start of the house price fall was a direct result of the withdrawal of mortgage funding from significant sections of the UK market. Without intervention there is every possibility that as much as a housing market over corrects on the way up, it may also over-correct on the way down.

The disappointing element is the exclusion of remortgages from the guarantee given the large numbers of UK borrowers who are likely to be stuck on lenders uncompetitive SVRs. Remortgaging has in recent years consistently made up circa 40% of the UK mortgage market and the exclusion of funding to this section of the market means that the benefits of broader and cheaper mortgage funding will not be passed on. The inability of existing home owners to access cheaper funding, whilst not having the same direct impact as purchases, will in its turn ultimately affect prices and the level of available cash in the economy.

The report is very readable. For full detail of the report please click here