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New liquid idea flows from CML

16th July 2008 |

When it launched its special liquidity scheme in April, the Bank of England was quick to stress that this was no quick fix for the mortgages market. While the £50 billion in bonds it was making available to major lenders was intended to ease the situation, it poured cold water on the notion that all would soon be well with the mortgage market, with lending restored to something at least approaching pre-crunch levels.

That this has been the case since then has been evident enough, although the Council of Mortgage Lenders (CML) reported a small rise in loans for home purchases in May (albeit along with less remortgages) and several banks have announced they are trimming their mortgage costs as swap rates drift down, the latest being Nationwide today.

But for some, this is not enough. To stimulate property investment and reinvigorate the market, the Council of Mortgage Lenders has proposed what it believes will be a more effective scheme, one that, unlike the special liquidity scheme, will be market-led.

Under its proposals suggested today, the Bank will offer lenders a secured repo facility backed by the collateral of residential mortgage backed securities or covered bonds, which will first be sold to investors on the market.

The significance of this, the CML stated, is that it will draw investors back into the market, with this sector then providing the finance and the repo aspect giving them back the confidence that the credit crunch took away. It also stated that by including binds produced since December 2007, it would cause a greater flow of funds into the market.

Commenting on the plan, CML director Michael Coogan said there was a "window of opportunity" for the government and the Bank should "act quickly" and implement the scheme.

He added: "This proposal has the virtue of being delivered through the market itself. Unlike a government guarantee, the investor keeps the credit risk. But it specifically incentivises investors, which the special liquidity scheme does not. And it can be implemented quickly, in an environment where speed is of the essence."

If the possible success of the plan in boosting the market is at all dependent on the enthusiasm shown for it by the property industry, then the reaction may be a good sign.

Ross Bowen, managing director of Connells Survey and Valuation, said: "We welcome the CML's initiative to help restore more normal functioning to the mortgage market. The need for effective, decisive action is vital." This endorsement was joined by Stuart Baseley, the executive chairman of the Home Builders Federation, who stated: "Any action that will inject liquidity back into the mortgage market, and so invigorate the housing market must be welcomed."

Both Mr Baseley and the CML suggested the government should not wait for the results of the Crosby review, which is due to report back to the Treasury in the autumn on what to do next. If the CML proposal produces early action, it may offer investors a better market in which to operate sooner than they expected.