Eager anticipation of Treasury’s mortgage rescue plan

Permalink: Eager anticipation of Treasury’s mortgage rescue plan
by Lin Freestone

An interim report into the funding problems being experienced by UK banks is scheduled to be presented to the Treasury tomorrow by Sir James Crosby, a former chief executive of HBOS.

There is anticipation that the report will forecast that the position of scarce mortgage resources could persist for some time, with an ever more damaging effect on the housing market. Banks are facing a huge funding gap caused by the collapse of the securitisation markets. These markets used to provide approximately 40% of security for home loans.

A rescue plan being prepared by the Treasury could involve amounts in the region of £40bn to £50bn a year to fill the funding gap.

Initial workings for the rescue plan are thought to include a plan for the Government and banks to exchange new mortgage debt on agreements issued this year for gilt-edged government securities. This is an extension of the Bank of England’s Special Liquidity Scheme in which the Bank exchanges treasury bills for old mortgage debt.

So far the Bank of England has swapped older mortgage-backed securities to the value of £50bn, which has helped the economy. If a similar facility were to be offered for new mortgages it might have a similarly beneficial effect, allowing the mortgage market and house prices to return to normal.

It is not known how keen the Governor of the Bank of England would be on the idea of bailing out the UK mortgage market, and it is speculated that there may be some reluctance on his part to play a direct role.