Page last updated at 12:35 GMT, Tuesday, 29 July 2008 13:35 UK

UK mulls mortgage market options

Mortgages have become harder to get in the wake of the credit crunch

The government may have to give a taxpayer guarantee to billions of pounds of mortgage market bonds if it wants to recover from a credit crunch.

The option is one of a number raised by Sir James Crosby as part of a report commissioned by the Treasury that looks at ways to revive the mortgage market.

But such a move would be controversial and could be seen as the partial nationalisation of mortgage finance.

It comes as figures showed new mortgage approvals had fallen to a record low.


Sir James is the deputy chairman of the City watchdog, the Financial Services Authority.

Without action, the situation in the housing market will be worse than it needs to be
Michael Coogan, Council for Mortgage Lenders

According to the BBC's business editor Robert Peston, Sir James's assessment of the health of the British mortgage market is about as gloomy as it is possible to be.

In recent months, the availability of mortgages has been reduced by banks and building societies, and many of them are asking for larger deposits or are lending smaller amounts.

Sir James fears that a long-term mortgage drought would turn the current downturn in house prices and consumer spending into something considerably worse.

The Council for Mortgage Lenders (CML) agreed, urging the Treasury to work "with urgency" to find ways to plug the gap in mortgage funding.

"Without action, the situation in the housing market will be worse than it needs to be," said CML director general Michael Coogan.

"The housing correction will overshoot, and the knock-on effects on the wider economy will be significant," he said.

'Financial stability'

One option for improving the availability of mortgage finance would be for the government to guarantee new better quality mortgage-backed securities, to re-stimulate demand for these securities.


That may be necessary, Sir James said in the report, in view of the government's objectives of supporting financial stability and operating in the long-run interest of consumers and the economy.

However, he pointed out that the government would need to ensure that any steps it took did not create a "moral hazard", where there was less of an incentive for participants in the market to behave responsibly.

According to the BBC's business editor, any such plan where the government guaranteed bonds would essentially be seen as the taxpayer underwriting the mortgage market, and would be immensely controversial.

That is why the Chancellor is studying the proposal, but is not yet ready to commit to it, our correspondent said.

'Housing bubble'

Why should my taxes go to pay off other people's mortgages when I can't even afford a mortgage myself?
Lisa Butler, UK

The Liberal Democrat Treasury spokesman, Vince Cable, told the BBC before the publication of the report that he was uneasy with the idea for two reasons.

"First of all this is a straightforward proposal to let the government take the risks for private lending and companies will continue to make their profits from it," he said.

"Secondly because it could have an effect of simply reflating this housing bubble that is now bursting in a rather painful way and reflate it in a way that prevents first time buyers ever getting on to the ladder."

The Conservative shadow chief secretary to the Treasury Philip Hammond insisted there is a "need to be very careful before we put any more taxpayers' money at risk".

'Liquidity scheme'

This is one of a number of other options outlined in the interim report, which also includes industry-led initiatives to facilitate the development of a "gold-standard" for mortgage-backed securities.

The Council for Mortgage Lenders said it disagreed with a government led approach and instead favoured an expansion of the Bank of England's Special Liquidity Scheme to encourage banks to issue more bonds and stimulate mortgage lending.

"It is right for the market to help itself and to heal its own problems," the CML's director general Michael Coogan told Radio 4's World at One programme.

"It is not for the government to bail everyone out every time. We are looking for an approach that will provide short-term assistance to kick-start the mortgage market."

Sir James Crosby said he would work with interested parties over the summer months and produce his recommendations "as soon as possible thereafter".

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