Mortgage Financing - room for improvement?

Seven months is a long wait - especially when a housing market is in turmoil and home owners eagerly await every snippet of good news. When it was first commissioned in April 2008, Britain’s economy looked like weathering the storm with at worse a small correction. Since then, the mishandling of Lehman Brothers and a myriad of other mishaps across the globe have caused a bad situation to become worse. HMS Britain has been well and truly buffeted, and one of the longest periods of economic growth has come, rather abruptly, to an end.

Sir James Crosby, former Chief Executive of HBOS (perhaps not quite the accolade it was after recent events) was trusted with reviewing the workings of the UK mortgage market and identifying improvements. Not an easy task at the best of times, but the changing economic landscape has provided a rich source of material and given real-world impetus to what could have been a dry subject.

Crosby’s aim is to enable the market to function more effectively, urging the Government to encourage the banking industry to adopt new standards of transparency and standardisation. He warns that a sustained reduction in mortgage finance would have dire consequences for the UK economy. Unlike for example Switzerland and Germany, where the rented sector is proportionately larger, falling property values and lack of finance have a real and vivid impact on the way the economy operates. Each time someone moves house they set in place a chain reaction of events which keeps the economy bubbling along: estate agents get paid commission, the Government claims VAT on fees and stamp duty land tax which helps oil the wheels of the welfare state; and shops from IKEA to John Lewis help us kit out our homes with glistening new white goods and wood floors.

Sir James Crosby recognises the dilemma when he states that “there is a real that the shortage of mortgage finance now forces the housing market to overshoot on the downside. " In other words, we’re in for a sharper shock than anyone was expecting.

So, what lessons can he provide and what can the Government do?

He has three basic points:-

Crosby Review - Key recommendations

1. Encourage banks to standardise mortgage-backed securities

2. Encourage the International Accounting Standards Board to reassess its "fair-value accounting" principle, which has forced banks to cut the value of their assets and resulted in the squeeze in lending between banks

3. States there is a "strong case" for Government intervention in the mortgage market, to guarantee £100 billion of mortgage-backed securities in 2009 and 2010

Without this last point, mortgage lending will grind to a halt. There is a strong possibility that the mortgage market, which has fallen from £100 billion to £40 billion in one year will actually contract, with more loans being repaid than given out. That could spell disaster for not only the housing market but also the wider economy. And what Chancellor would want to risk that with an election looming?