The report was commissioned by Alistair Darling to look into ways of bringing the mortgage market back to life, and as Sir James Crosby was chief executive of HBoS, the UK’s largest mortgage lender, he should know a thing or two about mortgage funding. But the Crosby Report spends a lot of time analysing what the background was, showing quite how the UK’s mortgage funding had been achieved, and covering how the UK’s mortgage market has shown phenomenal growth in the past five years.
In 2002 gross mortgage lending was £220bn, and in 2007 this reached just under £364bn. A vast amount of this growth was funded by securitisation, as investors craving solid returns with low risks were keen to snap up mortgage-backed securities. This led to a massive expansion in the number of lenders. Seemingly anyone with an ability to distribute mortgages, especially sub-prime and other specialist mortgages, was launching their own lenders.
Since last year the market for mortgage-backed securities has collapsed with virtually no willing buyers. Buyers experienced severe losses on American sub-prime mortgages and were nervous about any security backed by a mortgage. The disappearance of these buyers has led to a vast reduction in the supply of mortgage lending. Many of the UK’s newer lenders launched with business models that were reliant on this type of funding. Without any retail savers most of these lenders have either gone into administration or stopped lending and mothballed their operations, hoping they can survive until the credit markets reopen.
Anyone hoping to see a silver bullet in the report that would make all of our problems go away would have been severely disappointed. Crosby found there is no magic solution, and if there was, the market would have already implemented it. Part of the problem is that the market got carried away and ignored the risks involved with specialist lending. The main issue now is that the lack of supply of mortgage funds in the market is pushing house prices down. This means that investors are less likely to want to buy mortgage-backed securities if house prices are expected to fall further.
The report does suggest that the Bank of England could extend its Special Liquidity Scheme and lend banks directly whatever they need, accepting more mortgages, or mortgage-backed bonds, as collateral.
And it does discuss using Government guarantees to help kick-start investors buying mortgage securities. Clearly the chance to buy assets which pay a high return – as rates are so high at the moment – but backed by the Government, would be very appealing to investors.
However, the report highlights the moral hazards linked to any guarantee. Essentially the lenders and the investors would receive all of the upside but the risks are carried by UK taxpayers. This sort of bail out hardly encourages lenders to behave sensibly in the future as they get to keep all of their gains but feel that they will be saved by the state if it all goes wrong.
As the Government has seen with Northern Rock, any intervention with taxpayers’ funds is politically a hot potato. It is highly unlikely the Government would need to step in to nationalise the banks, but it will be hard for the Government to share in the upside of its actions. Another danger is that Government intervention may help delay the solution the market would have implemented. However, the costs of a laissez-faire approach might be costly, especially with the economy in its current condition. House prices are likely to show double digit falls; those involved in the housing market, estate agents, mortgage brokers, surveyors and solicitors are experiencing terrible market conditions. Stamp Duty receipts are running at 50% of what the Government was predicting.
Anyone expecting an easy solution will have been disappointed, but they would also have been naïve to assume that such a solution existed. The Government is damned if it supports and it is damned if it does not. I am not sure that the final part of the report will be as eagerly awaited but there will certainly be fewer property industry professionals left to read it. n
Jonathan Cornell is managing director of Hamptons International Mortgages
