Plan To Revive Mortgage Market

[Scott]

http://news.bbc.co.uk/1/hi/business/7530273.stm

The government may have to give a taxpayer guarantee to billions of pounds of mortgage market bonds.

The recommendation is part of a report commissioned by the Treasury that looks at possible ways to revive the UK mortgage market.

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

The report expects the shortage of mortgage finance to persist till at least the end of 2010.

The assessment of the outlook for mortgage finance is due to be published later by Sir James Crosby, the deputy chairman of the City watchdog, the Financial Services Authority.

Gloomy

Sir James's assessment of the health of the British mortgage market is about as gloomy as it's possible to be.

This former banker blames a collapse in demand for mortgage-backed securities, or investments created out of mortgages and sold to banks and big investors.

This is not just a City of London phenomenon.

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

So he believes it may be necessary for the government to guarantee new better quality mortgage backed securities, to re-stimulate demand for these securities.

That may be necessary, Sir James is expected to say later this morning, in view of the government's objectives of supporting financial stability and operating in the long-run interest of consumers and the economy.

But it would be seen as the taxpayer underwriting the mortgage market, the partial nationalisation of mortgage finance and it will be immensely controversial.

[council dweller]

Listen to that 11 minute thing from the Today programme!! (on that link)

Good old Vince Cable....but those VI's should be hung, drawn and quartered. This country needs a revolution!

[aliveandkicking]

Sounds like he just wants to be helpful.

Securitization enabled a banker to pass on his risks while collecting up front fees and longer term servicing costs for years to come. Via that process he could move away from the messy buisiness of taking risks and instead just collect management fees. A bit like an estate agent who bills you for all repairs and extracts a percentage of all your income but takes no personal risk in property.

So the question now is how can a better quality securitization market be created that enables a bank to pass on its risks to others in a less risky manner for investors while the banks still collects its fees for years to come at little or no risk to itself.

It cannot be done.

Instead banks will have to gaurantee their bonds and offer profits for its investors *or* allow market forces to be applied to the interest rates on MBS so that right now mortgage lending rates reflect the true cost of money.

But right now bankers want the cost of money to be as low as possible

Sensible lending in the current environment is still possible. The tax payer could be involved in sensible lending and that would be sensible to maintain an orderly market. But the problem is that insane lending has preceded this period and now sensible lending can do nothing to help. Anyway the banks are more than willing to conduct sensible lending without any help and they could no doubt securitize such products.

So the question is really how can we recreate unsensible lending again and not have to take the risk ourselves, so that we begin to get rid of the liabilities we have accumulated which nobody wants to buy *now* so that we can do that *later* in such a manner that when we sell we dont just recreate the problem we are attempting to fix?

Obviously they are going to need some help here!

[right_freds_dead]

whatever the solution, asking a failed chief of a failed back for advice is not a good idea.

[insidetrack]

He could have summed it all up in a few sentences. How about...

The cheap and easy mortgage lending of previous years was only possible while property prices were rising. Property prices rose because of the cheap and easy credit. This was unsustainable in the long run because house prices could not rise to infinity. Prices are now falling and cheap and easy credit has been replaced by normal prudent lending. There is feck all the government or anybody else can do about it. Thank you and goodnight.

[Smell the Fear]

So the question is really how can we recreate unsensible lending again and not have to take the risk ourselves, so that we begin to get rid of the liabilities we have accumulated which nobody wants to buy *now* so that we can do that *later* in such a manner that when we sell we dont just recreate the problem we are attempting to fix?

Exactly, this is an attempt to offload risky loans to the taxpayer.

Unfortunately we have a government who are easily panicked and prone to trigger happy action. The banks are basically saying "bail us out or you may get a full scale financial system implosion". If this was to be the case then perhaps a bailout would be the lesser of two evils?

It's pretty clear that the stupid lending has to stop as far as all new mortgages go, but the banks want to offload the rubbish they have now so that they aren't completely wiped out by this.

To some extent the government IS responsible - they failed to regulate the mortgage market and the City of London and it looks like we will pay the price. The government are our representatives so of course we should ultimately foot the bill.

Perhaps this will be a wake up call to our fellow citizens and their attention will be engaged in watching what goes on in our name in future. Perhaps they will even begin to demand sensible economic policies.

Until the next boom starts, at least.

[DabHand]

The banks are set to lose a lot of money secured as it is against property. The banks must take these losses, or as they are hoping to do will attempt to foist them on the taxpayer.

Grip of Death.