This time three years ago I was speculating about the wave of capital that would be released into the mortgage market in 2008 and envisaged a far livelier business environment than we are experiencing today.
The problem, as I saw it, was that as a result of the Basel II Accord, truckloads of cheap money would be released by the big lenders at the expense of the smaller players, so what if one of them decided to go for market share and swamp the country with cheap mortgage loans?
Basel II, for the record, changed the way the banking system measured risk and offered a more sophisticated approach which allowed the astute players (Northern Rock included!) to reduce the amount of capital they held in reserve to cover bad debt.
I therefore asked the Financial Services Authority (as did many lenders, both big and small) if they would regard such a flood of cheap capital as a distortion of the market and try to regulate or cap the funds that would become available?
After many phone calls and emails I was pompously informed that the FSA did not respond to speculative or hypothetical questions about what might or might not happen in years to come.
Perhaps it had a similar perspective on liquidity and Northern Rock? Bizarrely the Rock was granted a waiver by the FSA under Basel II for its sophisticated approach to risk management just months before the run on its branches.
So now instead of being awash with funds, the system is creaking and the difference between expectation and reality beggars belief.
Indeed, the recent 0.25% interest rate cut by the Bank of England seems a paltry measure in face of the problem facing us. Certainly Michael Coogan, director general of the Council of Mortgage Lenders, hit the nail on the head when he observed that the rate cut was good news for borrowers with tracker mortgages but added that in dysfunctional market conditions, the base rate was not in itself a good guide to the cost or availability of funds to lenders.
“To improve the market in which lenders are operating and restore consumer confidence, the bank needs to coordinate successive base rate cuts with further injections of more widely available liquidity,” he said.
Equally apposite was the observation by Tim Fletcher, sales and marketing director of Baseline Capital, who described the Monetary Policy Committee’s decision as irrelevant. “The BoE has effectively lost control of retail interest rates which have become decoupled from the base rate set by the MPC.”, he said.
The scarcity of mortgage funds is beginning to be reflected in house price figures but even a fall in house prices won’t be good news for aspiring first-time buyers for as Peter Williams. chairman of Academetrics, has pointed out, the scarcity and higher costs of mortgages is squeezing affordability. On that basis, prices will have to fall a lot further, or mortgage market liquidity will have to improve dramatically before the market can reach equilibrium.