The Council of Mortgage Lenders (CML) has submitted a proposal to the Treasury which urges it to offer the mortgage market more assistance, and the sooner the better.
With "quick and decisive action", the CML's proposal
states that the Government could divert at least some of the current and future difficulties faced by the industry and by mortgage
holders as credit remains tight and house prices fall.
The CML has proposed such actions as implementing measures to improve the functioning of existing private sector mortgage and bank funding markets, creating a gold standard for RMBS (residential mortgage-backed securities), creating a mortgage funding entity with government support, implementing a government guarantee on lenders' RMBS and covered bonds (CBs). It also expressed that it would like to see an enhanced sale and re-purchase ('repo') facility.
The Council believes that its proposed measures are a way of "kickstarting" the UK residential mortgage-backed securities and bond markets which have been "dysfunctional" ever since credit dried up between lenders last summer.
The loss of these markets has been the primary cause of contraction in the wider mortgage market (which the CML predicts to halve in size this year), the consequential lack of availability to the consumer, and higher borrowing costs.
The repo plan would act as a catalyst to restore confidence in the market, while the mortgage industry itself would be providing the solution. The Bank of England would merely be there to offer security for the RMBS and CBs in order to break the current trend.
The plan shares similarities with the Bank of England's Special Liquidity Scheme
(SLS), which it rushed in earlier this year in an attempt to restart lending. However, the CML says that there are significant differences – namely, it is targeted specifically at new RMBS and CBs, which the Treasury excluded from its SLS, and it will also galvanise investors back into the market in a way that the SLS failed to pull off.
"This is important as a step back towards self-sufficiency in the mortgage securities markets" the CML 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." said Michael Coogan, director general of the CML. "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."
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