Proposals for mortgages to be graded by order of risk still in the pipeline

Permalink: Proposals for mortgages to be graded by order of risk still in the pipeline
by Kay Mitchell

Following yesterday’s budget, the proposal for Government backed ‘gold standard’ mortgages is still on the agenda.

Chancellor Alistair Darling confirmed a working group to investigate the feasibility of such a scheme would be established.

The Government plan to launch a new system which will grade all mortgages, with the least risky given a gold standard Kitemark. It is hoped that the new scheme will make it easier for lenders to sell on mortgages to investors by providing them with greater reassurance about the quality of the loans they are signing up for.

The new system is designed to re-open the market for wholesale mortgage financing. It is hoped that getting the wholesale money markets working again will provide banks with access to cheaper funding, which could result in lower mortgage rates for consumers.

Government statistics show some £100 billion worth of mortgages are funded by secondary borrowing (i.e. using funds from money markets rather than deposits), making up 30% of the UK market.

The Chancellor said it is imperative that lenders have access to stable and low cost funding so that mortgage rates can come down as soon as possible. We will to bring together, investors and lenders with the Treasury, the Bank and the Financial Services Authority (FSA) to find market-led solutions to strengthen these funding markets further, added the Chancellor.

Such a scheme has been welcomed by some in the industry. Peter Williams of the Intermediary Mortgage Lenders Association (IMLA) said we welcome the chancellor’s setting up of a working group to promote the creation of a ‘gold standard’ for UK mortgage backed securities and we will be pleased to support this and provide its expertise to this initiative.

The IMLA is concerned the credit squeeze will continue to maintain a negative hold on the UK mortgage market unless something is done.

The Council of Mortgage Lenders (CML) also welcomed the move. Michael Coogan of the CML said we welcome the announcements of further consultation on market-led solutions to strengthen the mortgage funding market and hopes for early progress with active participation by the Bank of England.

It is understood that the Chancellor plans to carry out a quick consultation with banks about how the system would work, with a view to introducing it by the autumn.