"Firstly, and looking to the longer term, I believe that the Government should actively encourage the banking industry, both domestically and internationally, to adopt new standards of standardisation and transparency in the market in mortgage-backed securities. As and when the market recovers, this will ensure that it functions much more effectively.
Secondly, and again in the interest of the longer term health of funding markets, I also believe that the Government should encourage the International Accounting Standards Board with its review of the application of its fair value accounting principle so that without making any compromise on transparent disclosure, such an important accounting principle is no longer itself a cause of instability in the financial system.
Finally, and of more immediate import, I believe there is a strong case for the Government to intervene in mortgage finance markets with the explicit objective of containing the impact of the financial turmoil on consumers and the wider economy. My recommended intervention is the auction, during 2009 and 2010, of around £100 billion of the guarantees (to be attached to new issues of mortgage-backed securities) set out in this report. Coupled with now much lower base rates, I believe such intervention would be effective in improving the availability of mortgage finance to consumers and in directly stimulating activity in the housing market, averting the risk of a protracted fall in house prices. It would therefore be of huge benefit to the economy and the public finances whilst affording significant relief to homeowners and wouldbe homeowners."
Comment
"The Crosby Report makes three key recommendations and in drawing up these proposals Sir James makes the following very relevant points", comments Ray Boulger, Senior Technical Manager at leading UK mortgage broker John Charcol.
Sir James said:
"I believe there is a strong case for intervention in mortgage finance markets."
"The real risk is that the shortage of mortgage finance now forces the housing market to overshoot on the downside."
"It is very likely that net mortgage lending will fall below zero."
"In my opinion there is a strong case for further government intervention."
"Injecting some sort of Government guarantee into mortgage funding markets looks like the best option. Whilst not entirely without risk, this intervention would be highly likely to be profitable for the Government."
Specifically his three recommendations are:
Auctioning in 2009 and 2010 £100m of guarantees to be attached to new issues of mortgage backed securities.
New standards of standardisation and transparency to be adopted for new issues of mortgage backed securities.
The International Accounting Standards Board to review its fair value accounting principle, i.e. mark to market accounting, so that it is "no longer itself a cause of instability in the financial system."
Boulger continues, "Unfortunately, the comments on these proposals made by The Chancellor in his Pre Budget Report demonstrate he has completely failed to recognise the urgency with which Sir James' principle proposal, i.e. to guarantee the issue of new mortgage backed securities, needs to be implemented." The Chancellor said "I share Sir James's concerns about the availability of mortgage finance. To implement Sir James's recommendation, the Government would need to obtain State Aid approval from the European Commission and resolve some technical and practical considerations but we will proceed to work up a detailed scheme based on his recommendations and seek State Aid approval to proceed."
However, actions speak louder than words and The Chancellor said he won't be reporting any further on Sir James' proposals until next year's Budget. That is much too slow - the mortgage market needs access to additional finance now.
It is unfortunate the British Government has delegated to the European Commission the power to dictate whether or not we can support our domestic mortgage industry in the way deemed most appropriate by Westminster. It is also unfortunate that as a consequence The Chancellor apparently feels unable to indicate when he expects to be in a position to start offering the guarantee scheme, although at least his comments suggest he does expect the European Commission to kindly allow him to implement the scheme.
Boulger concludes, "Lower interest rates are likely to stimulate additional demand for homes in the New Year and it will be unforgivable if The Chancellor's lack of urgency in implementing the key Crosby proposal to guarantee new mortgage backed securities stalls the long awaited and much needed improvement in activity in the housing market. Bearing in mind The Crosby Report has been months in preparation and The Treasury will no doubt have seen this key recommendation in drafts well before today it is a pity action was not taken to allow an announcement today that the scheme had been agreed and that the first auction would be no later than early January next year."
