Britain's Mortgage Market Needs Qe-Backed Rescue Says Think-Tank

[fellow]

http://www.sharecast.com/cgi-bin/sharecast/story.cgi?story_id=3795424

LONDON (SHARECAST) - Britain's mortgage market needs a government-backed buy-out of the worst loans to get it moving again, a leading think-tank has warned.

According to Fathom Consulting, many households "are being kept afloat by near-zero interest rates, which cannot last forever, at least not with a functioning economy".

The low rates are also allowing banks to avoid classifying their potentially most at risk mortgage loans as impaired and writing them off. But the banks are aware of the potential problem and so are being cautious in their lending, restraining the supply of credit, Fathom says.

"Compare Britain today to Japan in 1997 and there's not much difference. They had zombie companies, we're in danger of creating zombie households," say report authors Danny Gabay and Erik Britton.

They warn that a sharp rise in interest rates to 3.5%, from 0.5% currently, could spark another credit crunch, as householders default and property prices tumble.

A 20% fall in property prices could mean the debt servicing burden would match its peak at the height of the crisis crunch, with the UK's banks facing a capital shortfall of £180bn, Fathom suggests.

The paper argues the government must adopt the Northern Rock style approach across the whole banking sector with a quantitative easing programme to pay for it.

Northern Rock, which was rescued from collapse by the government in 2008, shunted all of its non-performing mortgages into a "bad bank".

A UK-wide version of this "bad bank" would issue bonds to buy the most vulnerable mortgages at an appropriate discount, or haircut. "The Bank of England should use QE to buy this bond".

As a first step, the BoE should increase its current QE programme by £50bn, which would buy about £70bn of mortgage debt, Fathom recommends.

[Har Fast]

http://www.sharecast.com/cgi-bin/sharecast/story.cgi?story_id=3795424

ahem

this too

[Selling up]

"Compare Britain today to Japan in 1997 and there's not much difference. They had zombie companies, we're in danger of creating zombie households," say report authors Danny Gabay and Erik Britton

I thought that the view of the majority of economists on Japan was that the government should have allowed a quick deflationary depression rather than propping up a slow deflation over 20 years. Am I mistaken?

Becuase this article seems to be advocating propping up a slow deflation over 20 years.

[Liquid Goldfish]

I thought that the view of the majority of economists on Japan was that the government should have allowed a quick deflationary depression rather than propping up a slow deflation over 20 years. Am I mistaken?

Becuase this article seems to be advocating propping up a slow deflation over 20 years.

I think what they're advocating is about a 25% across the board devaluation of property values

Anyone then found to be in negative equity at thsi new value is transferred to a bad bank

IRs can then go back up to normal levels to stop the zombie behaviour

Edited November 2, 2010 by oldsport

[libspero]

I think what they're advocating is about a 25% across the board devaluation of property values

Anyone then found to be in negative equity at thsi new value is transferred to a bad bank

IRs can then go back up to normal levels to stop the zombie behaviour

I didn't get that at all from the article above.. makes sense after reading Har Fast's links though.

I actually think it's a very good idea and would allow them to lower house prices without causing a run on the banks again.

The caveat they are missing is that all banks should be forced to buy back any bad debts they sell at some point in the future for the full cover value paid by the BoE.. irrespective of what they are actually worth. The banks shouldn't just get off the hook on this one.. if they are slowly paying them off over a long period it will act as a constant reminder not to be so ****ing stupid in future.

Edited November 2, 2010 by libspero

[Liquid Goldfish]

I didn't get that at all from the article above.. makes sense after reading Har Fast's links though.

I actually think it's a very good idea and would allow them to lower house prices without causing a run on the banks again.

The caveat they are missing is that all banks should be forced to buy back any bad debts they sell at some point in the future for the full cover value paid by the BoE.. irrespective of what they are actually worth. The banks shouldn't just get off the hook on this one.. if they are slowly paying them off over a long period it will act as a constant reminder not to be so ****ing stupid in future.

It's only my view from reading the two articles and listening to the brief interview with the author on R4.

But, we'd need to see the full report to know for sure what they're proposing and I think you need to pay for that

Mr Gabay said the Bank should start with £50bn of QE, which would buy about £70bn of mortgage debt

That would be a 28% haircut

Edited November 2, 2010 by oldsport

[libspero]

That would be a 28% haircut

My only concern.. once the banks are able to lend again will there be the political will to allow prices to fall, or will they just go back to pumping up the housing market?

[Liquid Goldfish]

My only concern.. once the banks are able to lend again will there be the political will to allow prices to fall, or will they just go back to pumping up the housing market?

tricky

money will still be pretty tight, though and then there's hopefully the new FSA rules

[Si1]

I didn't get that at all from the article above.. makes sense after reading Har Fast's links though.

I actually think it's a very good idea and would allow them to lower house prices without causing a run on the banks again.

The caveat they are missing is that all banks should be forced to buy back any bad debts they sell at some point in the future for the full cover value paid by the BoE.. irrespective of what they are actually worth. The banks shouldn't just get off the hook on this one.. if they are slowly paying them off over a long period it will act as a constant reminder not to be so ****ing stupid in future.

I am starting to warm to this idea - would the bad bank therefore own all the repos?

[billybong]

A UK-wide version of this "bad bank" would issue bonds to buy the most vulnerable mortgages at an appropriate discount, or haircut.

"would issue bonds". Wowee, bonds!!

The conmasters and crazies really do rely on the word "bond" to try to signal a level of integrity rather than the reality of more dross bonds - and you know, bonds issued by a "bad bank" what could be worse

Issued at an "appropriate haircut" from an industry completely and utterly raddled with fraud

I bet the crazies even say on each bond it's regulated by the FSA

Great, it sounds like even more of the fraudclosure further down the line.

Edited November 3, 2010 by billybong

[ingermany]

I am starting to warm to this idea - would the bad bank therefore own all the repos?

There would be no repos. The non-performing loans would just get added to the national debt. Off balance sheet presumably.

It is intended to work like this:

The mortgage non-payer gets to keep his 250K home for free. The bank that issued the mortgage is relieved of the bad debt so can then can lend 300K to someone else, who can buy the house. The mortgage non-payer/homeowner sells at 300k, and now has 50K equity for a deposit.....he can now borrow 350K to get his original house back.

[Bloo Loo]

There would be no repos. The non-performing loans would just get added to the national debt. Off balance sheet presumably.

It is intended to work like this:

The mortgage non-payer gets to keep his 250K home for free. The bank that issued the mortgage is relieved of the bad debt so can then can lend 300K to someone else, who can buy the house. The mortgage non-payer/homeowner sells at 300k, and now has 50K equity for a deposit.....he can now borrow 350K to get his original house back.

wot?

theyll be QEing every month....and people in dire straights will stop paying...indeed....ALL mortgage payers would stop paying as they know that there is a bad bank to buy up their loans.

Of course, Bloo Loo will get a huge mortgage and buy that dream home too...then stop paying the day after he moves in...its OK, the bank will move our loan to the bad bank, and my 500K loan will be repaid to them at 28% off and I effectively received £1.5M taxpayers subsidy.