Perhaps so. But the Bank data gave proof, if proof were needed, of the scale of the recent slide in new mortgage lending, and underpinned the justification for considering the serious levels of market intervention floated in the Crosby report.
Gloomy Bank figures
Total mortgage approvals in June were down to 165,000 (compare and contrast with the 290,000 last June), within which house purchase loans slumped to just 36,000 (114,000 a year ago). House purchase approvals totalled £5 billion in June, only just over half their £8.9 billion previous six-month average – itself hardly a vintage period for lending – and a staggering 70% lower than the £17 billion of house purchase lending in June last year.
Against this backdrop, the mortgage and property industries have collaboratively been attempting to put constructive proposals to the government to unblock the funding logjam.
Last week, in the wake of the US government’s interventions to protect Fannie Mae and Freddie Mac, the CML revealed to the public domain a proposal submitted to Sir James Crosby and his review team. We decided to go public to demonstrate that the industry is thinking about a more flexible and fleet-of-foot solution than cumbersome structures of the Fannie/Freddie model.
Cross-industry proposal
The proposal has attracted wide-ranging support and is collectively proposed by a broad coalition of trade bodies. Collectively, the following 12 signatories sent a letter to the Financial Times in support of the proposal which was published on Saturday 26 July:
· Michael Coogan, Director General, Council of Mortgage Lenders
· Chris Cummings, Director General, Association of Mortgage Intermediaries
· Liz Peace, Chief Executive, British Property Federation
· Sarah Webb, Chief Executive, Chartered Institute of Housing
· Stewart Baseley, Executive Chairman, Home Builders Federation
· Jonathan Fair, Chief Executive, Homes for Scotland
· Peter Williams, Executive Director, Intermediary Mortgage Lenders Association
· Peter Bolton-King, Chief Executive, National Association of Estate Agents
· David Orr, Chief Executive, National Housing Federation
· David Salusbury, Chairman, National Landlords Association
· Imtiaz Farookhi, Chief Executive, National House Building Council
· Peter Goodacre, President, Royal Institution of Chartered Surveyors
Essentially, these bodies are collectively in favour of incentivising the issuance of new mortgage backed securities and covered bonds, by allowing investors who buy them to enter into a repo arrangement with the Bank of England, and so ensure ongoing liquidity in these financial instruments. Although it uses the same repo instrument as the existing Special Liquidity Scheme, the proposal is different in two crucial ways. First, it would require the MBS or bonds to be sold in a public issue before being eligible for the repo facility, and second it would be a measure specifically targeted at improving the flow of funding to support new mortgage lending.
The interim analysis from Sir James Crosby clearly takes account of this proposal, but stops short of recommending it – or, indeed, any other specific measures – to the Chancellor at this stage. Essentially, the interim report is a description of the problems facing the market, and an outline of the proposals that might be considered to address them.
Gloomy Crosby
It makes for gloomy reading. In his letter to the Chancellor prefacing his report, Sir James observes that banks “are competing aggressively for savings but with consumers’ disposable incomes now under such pressure from rising prices, I do not believe that this will prompt a surge in aggregate savings inflows…”. He goes on to add that more than half of banks’ existing mortgage-backed borrowings will need to be repaid over the next three years, and so “their capacity to make new mortgage advances therefore looks severely constrained.”
As a result, Sir James suggests, “such a shortage of mortgage funding will persist throughout 2008, 2009 and 2010, and I suspect that current forecasts for net new mortgage lending during this period will prove optimistic, perhaps significantly so.” Hardly good news, in an environment where the CML’s own £55 billion net lending forecast for this year now admittedly does look optimistic, and astonishing when set against last year’s equivalent of £108 billion.
The good news, such as it is, is that Sir James confirms that “Since, over time, we should expect any shortage of supply of mortgage finance to convert into a shortage of demand, I am looking with some urgency at the full range of options identified by market participants for stimulating the supply. I believe this will best be achieved through the return of significant new issuance of mortgage-backed securities, albeit not necessarily at anything approaching the rate of issuance seen in 2006 and 2007.”
The industry responds
We have welcomed the interim report, and urged the Treasury to make urgent progress towards implementing solutions. IMLA has a similar view, and has urged that solutions should address the problems faced by all lenders, not just deposit-takers.
The Association of Mortgage Intermediaries, meanwhile, expressed surprise that the report states that there has not been any industry consensus: “AMI, along with other industry representatives put our views forward in a joint open letter... We encouraged them to progress with the recommendations put forward by the CML and not to prolong the return to a properly functioning market. We are pleased to see that Sir James acknowledged the work of AMI in his recognition of a proposed Gold Standard for mortgage backed securities.”
The Home Builders Federation expressed disappointment at the delay in moving from analysis to the implementation of potential solutions: “If the Treasury does not take up any recommendations from Crosby until the Pre-Budget Report in October or November, this will unduly prolong the frustration of those – particularly first-time buyers – who are currently having difficulty obtaining mortgages to buy their own home. The benefits of action will not be realised until Spring 2009 at the earliest - seven or eight months from now. This is too big a price to pay as in the meantime steeply falling housing transactions, weakening house prices and sharply lower house building activity risk damaging Britain’s wider economy.”
The commentators’ take
As the media coverage builds, and analysis of the problems and solutions continues, we recommend two top picks for insightful comment on the situation. The first is BBC business editor Robert Peston’s blog
The other is economist Willem Buiter (who will be speaking at the CML annual conference on 2 December) writing in his engaging FT blog.
As for us, we will be continuing our best efforts to co-ordinate a holistic response and a broad consensus across the industry, to enable Sir James and the Treasury to take steps towards proposed solutions that should benefit the whole market if they help to contain the scale of the housing market downturn.
