Following today's publication of the Bank of England's Financial Stability Report, the Council of Mortgage Lenders reiterates its call to the Treasury to publish the long-awaited outcomes of the Crosby review of mortgage funding, which looks even more important in the light of some of the Bank's observations.
Key among these is the observation that prime UK mortgage backed securities (RMBS) are severely undervalued in the market at present, even if a relatively gloomy scenario for mortgage arrears is assumed. The Bank highlights that investors are demanding a significant premium for uncertainty, far exceeding any premium that might be demanded on any rational prognosis of performance. The Bank says: "Under both moderate and severe projections for UK mortgage arrears, AAA-rated UK prime RMBS claims do not experience fundamental credit losses. The economic values of these assets lie significantly above their current market values."
Michael Coogan, CML director general, commented: "The Bank rightly highlights the positive underlying credit quality of prime mortgage securitisations. Elsewhere, the report also highlights the funding gap between the level of deposits and the level of borrowing. This is an ironic juxtaposition, as this is precisely why we urged steps a year ago to incentivise new issuance of high quality mortgage backed securities. This would have acted as a way of reducing the impact of the inevitable narrowing of the funding gap, and enabling higher volumes of lending to continue, but was unfortunately rejected as a policy measure.
"We continue to find it frustrating that in the US, poor credit quality caused the funding crisis, whereas here in the UK the funding crisis has been a major cause of the worsening credit picture. Underlying UK mortgage credit quality has never been the primary issue, yet the reduction in funding to support new lending has had a detrimental impact on the credit quality of existing mortgages, through house price falls, a narrowing of options for borrowers and the prospect of rising unemployment."
