CML impatient for action

The Council of Mortgage Lenders yesterday called on the Treasury to publish the findings of the Crosby review of mortgage funding. The results of the review have been eagerly awaited as it is thought that it might contain some suggestions for possible solutions to the current liquidity crisis. The CML say that following observations contained in the Bank of England's Financial Stability Report which was published yesterday, it is now even more important to know the findings of Crosby.

One of the key messages to have come out of the Bank of England report, was the extent to which some Residential Mortgage Backed Securities, commonly referred to as RMBS, are severely undervalued. It has become widely known that one of the catalysts for the credit crunch has been the failure of RMBS's which consisted primarily of US sub prime mortgages secured on properties of questionable value. The fear with which these investments are now viewed has meant that the value put on UK RMBS's consisting largely of prime quality residential mortgages is very much lower than it should be. Even after making allowance for a huge increase in arrears, which has yet to materialise, the reduction in value attributed to uncertainty is far higher than any rational assessment may demand. The Bank of England states that under both moderate and severe projections for UK mortgage arrears, AAA-rated UK prime RMBS claims do not experience fundamental credit losses. The economic values of these assets lie significantly above their current market values.

Michael Coogan, CML director general, commented:

"The Bank rightly highlights the positive underlying credit quality of prime mortgage securitisations. Elsewhere, the report also highlights the funding gap between the level of deposits and the level of borrowing. This is an ironic juxtaposition, as this is precisely why we urged steps a year ago to incentivise new issuance of high quality mortgage backed securities. This would have acted as a way of reducing the impact of the inevitable narrowing of the funding gap, and enabling higher volumes of lending to continue, but was unfortunately rejected as a policy measure.

"We continue to find it frustrating that in the US, poor credit quality caused the funding crisis, whereas here in the UK the funding crisis has been a major cause of the worsening credit picture. Underlying UK mortgage credit quality has never been the primary issue, yet the reduction in funding to support new lending has had a detrimental impact on the credit quality of existing mortgages, through house price falls, a narrowing of options for borrowers and the prospect of rising unemployment."

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