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Some Light Reading For The Weekend: Cml Mortgage Lending Oulook To 2015

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I came across this from the CML recently (had a quick look could remember it coming up in discussions and have searched as well):


I know it is dated Jan 2010, but is still highly relevant to understanding the issue being faced by the banks, BS and other lenders.

It answers many questions that keep appearing in numerous threads etc and will enable better back of the envelope type calculations everyone loves...

39 pages, well worth reading with some juicy pictures and plenty of bear food:

Chart 2 The funding origin of UK mortgage debt

Chart 3 RMBS volumes

Chart 5 Mortgage repayment rate

Chart 7 Share of Gross lending

Chart 13 Retail deposits

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Thanks for this however unsightly the content.

It's a begging letter to the government!

Here's the executive summary for those who can't be bothered to follow your link

****WARNING - may require a sick bag****

Executive Summary

• This paper is written for an audience that is familiar with UK mortgage funding markets at a

technical level. It is aimed specifically at policymakers and others in a position to influence the

debate on how these markets might evolve and how government can positively influence their


• This report examines the outlook for UK mortgage funding over the next six years, in the wake of

the unprecedented turmoil in global capital markets and large scale government support for banks

seen since summer 2007.

• The loss of investor confidence in wholesale debt markets since 2007 has left a £300bn gap in

deposit takers’ funding that has had to be filled temporarily by government funds through the

special liquidity scheme (SLS) and credit guarantee scheme (CGS). These schemes expire in

2011 - 2012 and 2012 - 2014 respectively, leaving a major uncertainty overhanging the mortgage

market as to how lenders will be able to refinance this £300bn.

• Retail deposits will not be sufficient to fill the gap, so the return of functioning private sector

wholesale funding markets will need to play a role. But, for wholesale investors to return, they will

need to be confident that the legacy issues left in the wake of the financial crisis are manageable,

and above all that mortgage lenders and financial services markets will be profitable on a

sustainable basis going forward.

• Even with wholesale markets functioning again, it is very unlikely that lenders will be able to repay

government funds in full on the current timetable of the SLS and CGS, suggesting that an

extension of the period of government support will be required.

• The closure of wholesale funding markets, coupled with government support being focused

almost exclusively on larger deposit takers, has led to a dramatic reduction in competition in the

UK mortgage market.

• Regulatory changes risk reinforcing the adverse side-effects of the emergency response to the

crisis. The deluge of proposed regulatory reforms we have already seen internationally and in the

UK risks creating a patchwork of changes that do not sum to a coherent whole, and do not

provide market participants with the clarity that they need to plan for the future. Cumulatively, we

face a real risk of a series of unintended consequences.

• UK policy measures have focused on bank capital and liquidity, and on tightening mortgage

market regulation. Policy has been informed by a narrative that sees securitisation, wholesale

funded lenders, and non-conforming mortgage credit as problematic because of the events in the

US. Yet in the UK, residential mortgage backed securities (RMBS) and wholesale funded lenders

have both performed comparatively well, despite an absence of government support. If this policy

stance remains unchanged, the result will be a long term reduction in choice for consumers in the

mortgage market.

• If there was one outstanding cause of the crisis in UK banking, it was not insufficient capital or

poor quality mortgage lending in the UK, but the vulnerability of our banks’ funding structure. Yet

policymakers have focused on bank capital and liquidity, and even on fixing a mortgage market

that was not the cause of the crisis. At the same time, policymakers have not yet identified or

developed a sustainable funding model for the UK mortgage market going forward.

• The focus of government support on retail deposits, and senior unsecured bonds from banks and

larger building societies, and the failure to provide meaningful support to the RMBS and covered

bond markets, is seriously distorting the competitive landscape. It is creating a moral hazard

where depositors and senior unsecured bondholders may feel they have no need to understand

the risks they are running, because they will be supported by government.

• Ironically, given the lack of government support for RMBS and covered bonds, these funding

instruments have demonstrated their effectiveness during the financial crisis. They allow non-

AAA rated institutions to issue the AAA rated securities that the Bank of England (BoE) demands

as collateral for deposit takers seeking to access the SLS. It is difficult to reconcile the BoE’s

negative attitude to RMBS with its demand for AAA securities, given that banks can only satisfy

this requirement by creating retained RMBS or covered bonds.

• We conclude that the government needs a clear strategy for putting mortgage funding markets in

the UK back on a sustainable footing, with minimum possible distortion from future government

intervention or ongoing support. This requires government support measures and the regulatory

system to be much more even in their impact on retail deposits, senior unsecured bonds, RMBS

and covered bonds, and more even between different types of financial institution – banks,

building societies and non-deposit takers.

• To establish a clear strategy for the revival of UK funding markets, we believe that the Treasury

should devote resources to a collaborative exercise drawing on industry knowledge in an expert

group. With the termination of the SLS and CGS coming up, the Treasury has every incentive to

demonstrate that a robust long term solution will be put in place.

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Then there's this

This period of rapid growth in wholesale funding was driven by the exceptional strength of the

mortgage market and other lending segments (aided by the strength of global investor demand),

which outstripped the ability of retail deposit balances to keep up. Total outstanding mortgage debt

rose from £495bn at the end of 1999 to £1,187bn by the end of 2007, a compound growth rate of

11.6% pa.

Interesting that HP's during this time rose by about 9% (compounded) - who says there noi link to available capital and house prices?

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I'd say mortgage funding is now on a sustainable footing and requires no more assistance. House prices will have to fall to match available funds. Unless the CML is suggesting that public services be cut and taxes increased to sustain current house prices!

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First discussed here:


Mervyn King was questioned about the CML’s conclusions in this report by John Thurso at a meeting of the Parliamentary Treasury Committee on 23rd February.

John Thurso: Governor, on page 15 of the report you make it clear that banks will need to replace the funds that they have under the Special Liquidity and Credit Guarantee Schemes, and you also note the difficulties that may arise with sources of funding such as asset-backed securities which would imply that funding should come more from retail deposits, but there is gap over the last 10 years between what has come in retail deposits and what has been required of something like £180 billion. The Council of Mortgage Lenders has made the point that this will cause considerable difficulties for banks and building societies when the scheme comes to an end. You have made it clear that there is no way it is going to be extended. Do you reject their analysis of what is going to happen?

Mervyn King: I reject the argument that we should keep it going because they are not prepared to find alternative sources of funding, and the main reasons for that are the following. We made very clear that this scheme was temporary; it was a three-year window where the taxpayer would help to finance illiquid assets which had become illiquid in the course of the financial crisis and which it had not been entirely easy for those banks to anticipate would become illiquid, so this was a temporary scheme to offer them the chance to finance a very large stock, almost £200 billion, of assets which they could not easily otherwise finance. We gave them a three-year window to do that: there is no scheme in the world that is as generous as this scheme, and the banks were given full notice that they had three years to find alternative sources of finance. Many banks are doing just that and it would be quite wrong to argue that a taxpayer-subsidised scheme should be extended in order to penalise those banks that had recognised the need to find other sources of funding, even though they are clearly more expensive, but some banks are going out and finding other sources of funding, and it would be quite wrong to subsidise and reward those banks that had not bothered to find alternative sources of finance. The bulk of the SLS is accounted for by a relatively small number of institutions. We are working with them to make sure there is a proper pattern of refinancing over the next two to three years, so we do not suddenly face what is sometimes described as a "cliff" in which the funding just runs out; we are working with them to make sure they do look for other sources of funding beforehand. There may be some institutions that will find it difficult because of the nature of their business model, but there is nothing coming out of this financial crisis that will justify the taxpayer subsidising an existing structure for the financial sector. Some institutions may well need to accept a smaller balance sheet in future if they cannot attract new sources of funding. New institutions or other institutions that can attract new sources of funding will be able to expand their balance sheet, so there will be a shift, and I think the most important thing to hang on to in all of this is there is clearly no shortage of savings in either the UK economy or the world as a whole. The savings are there, the demand for borrowers is there, and we will need to find perhaps new ways to channel those savings to borrowers, so we are working directly with the banks in order to ensure that the SLS is unwound in an orderly way, and we are working with Government and the FSA to think about either new ways of constructing securitised instruments so that a different type of securitised market could be regenerated, or, indeed, alternative ways to channel savings to borrowers, both corporate and household.

John Thurso: What would be the characteristics of those securities that would make them more palatable than those which largely caused the crisis?

Mervyn King: I think the most important is that what turned out to be the case when the crisis occurred was that many of the pieces of paper that represented claims on mortgages, to take that one example, turn out to be extremely hard to value when people somehow finally realise that house prices could go down as well as up, because when house prices go down as well as up you need to know something about whose mortgages they are and whether these are the kind of people who will repay the mortgage, whether they will be affected by unemployment or not, and it turned out that the pieces of paper contained no information about these characteristics. It is not impossible to design securities which contain aggregate information on the pool of mortgages which is represented by those pieces of paper, and if there is to be a viable securitised market in mortgages, which I firmly believe can be recreated, it has to be on the basis that there is greater transparency and greater information about the liabilities and the people who are carrying the obligations to repay, otherwise it is very hard to know how much money you want to pay for that piece of paper. That is one aspect of it. There are other more detailed aspects to do with the specifically UK nature of master trusts in the securitised instruments which, in the case of Northern Rock, created a very difficult situation in which there was a tremendous pressure to keep issuing new mortgages to feed the trust with new mortgages each year. This is a very dangerous outcome in terms of the macro economy because you do not want to have instruments which have built into them an incredibly strong pressure to keep generating more and more mortgages. Mortgages will go up in the upswing of the cycle and may come down in the downswing and we need to allow that to happen naturally, so there are ways in which these instruments can be designed but, in the end, the market will determine it. What you cannot do is somehow believe it is sensible to sustain a particular market only on the basis of taxpayers' subsidy.


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This is a bit worrying if Merv is correct about there being plenty of money out there to fund mortgages

Mervyn King: ..................

and I think the most important thing to hang on to in all of this is there is clearly no shortage of savings in either the UK economy or the world as a whole. The savings are there, the demand for borrowers is there, and we will need to find perhaps new ways to channel those savings to borrowers, so we are working directly with the banks in order to ensure that the SLS is unwound in an orderly way, and we are working with Government and the FSA to think about either new ways of constructing securitised instruments so that a different type of securitised market could be regenerated, or, indeed, alternative ways to channel savings to borrowers, both corporate and household.

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...........so that a different type of securitised market could be regenerated.............

They don't even know how to sort out the current lot and they've tried, tried and tried again. "

"Working with Government and the FSA to think about either new ways of constructing securitised instruments..........." - it's bound to be a success then :P:P

But the next time it WILL be different :lol::lol::lol:

They're so out of their tiny minds.

Edited by billybong
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