If Prime Minister Gordon Brown provided a pair of armbands for our sinking mortgage market, then President George W Bush has sent in a flotilla of lifeboats.
While neither Brown nor Bush have come out of the credit crunch smelling of roses, the latter’s hands-on approach with the Federal National Mortgage Association and Federal Home Mortgage Corporation has at least garnered the maligned president some praise.
When Brown revealed his much anticipated mortgage rescue plan on September 2, the industry reaction was probably not quite what he had in mind. The lacklustre proposals did little to lift spirits and even less to restore confidence in the government’s ability to tackle prevailing market conditions.
By contrast, the most recent US rescue package has prompted some pundits to predict the end of the credit crunch. The US Treasury has taken control of struggling lenders Fannie Mae and Freddie Mac, expanding their access to Federal credit and announcing it will buy shares in the companies as required. In response, global shares have risen and fresh confidence is app-arent in the markets.
“Just over a year after European Central Bank action signalled the start of the credit crunch, this intervention could ultimately see its end,” says Rob Gill, City expert at Cobalt Capital.
While it may be too soon to crack open the bubbly and indulge in a rousing rendition of “Ding dong the crunch is dead”, it is obvious that the action taken by the US government since the crisis began has been more effective than Labour’s efforts.
But then Brown’s mortgage rescue plan was less about rescuing the market and more about bolstering industry and consumer confidence.
“There will be lots of shouting about the measures not going far enough but the government was never going to be able to flick a magic switch,” says David Hollingworth, mortgage specialist at London and Country.
Industry consultant Julian Wells agrees.
“The government measures are to be welcomed, no matter how token a gesture they are seen to be by the industry,” he says.
Labour’s proposals include a one-year Stamp Duty holiday for properties valued up to £175,000.
While this move was welcomed because it finally laid to rest speculation that the government would scrap the tax altogether – speculation that brought the housing market to a grinding halt – it has been criticised for not going far enough.
“The Stamp Duty exemption is a farce,” says sole broker Roy New. “Where I am based in south London, a first-time buyer would not be able to purchase a tent on Blackheath for £175,000.”
Similarly, the HomeBuy Direct scheme, which aims to give up to 10,000 first-time buyers access to affordable housing in the next two years by allowing consumers with household incomes under £60,000 to apply for equity loans of up to 30%, received little praise and plenty of criticism.
“Just 10,000 first-time buyers?” says New. “This number could be swallowed up by one of our major cities alone. The government should wake up and smell the coffee.”
Other proposals including a scheme to allow families to convert all or part of their mortgages into rental payments with councils, housing associations or developers were also met with scepticism.
Of course, the reaction to the proposals is unsurprising. Despite the mortgage industry hoping for positive news, most professionals expected a letdown.
“I was disappointed but not surprised,” says Danny Lovey, proprietor of The Mortgage Practitioner. “The mortgage rescue plan simply tinkers at the edges and does not address the main problems.”
A catalogue of widely criticised action and inaction since the credit crunch began has meant that many in the industry have lost faith in Brown and chancellor Alistair Darling.
Worse still, when compared with the decisiveness of the US government and Federal Reserve, the ineffectiveness of Brown’s Cabinet is stark.
“The US government and the Fed have been quick to act and have been aggressive,” says Alan Cleary, managing director of edeus.
“In Q2 the country’s economy grew beyond expectations and there is growing optimism that it may avoid the worst of the crunch. “Compared with the US, our government looks like a rabbit in the headlights, with little idea about what to do next,” he adds.
The most obvious comparison with the nationalisation of Fannie Mae and Freddie Mac is the Northern Rock crisis, which kicked off around a year ago.
All three are shareholder companies whose struggles were known by government. Indeed, NR issued a profit warning at the end of June 2007 but it wasn’t until the run on the bank hit its peak, with hordes of desperate customers queuing outside branches to withdraw their savings, that the government said it would guarantee client deposits.
As the hunt for buyers to save NR became ever more desperate, the Bank of England did nothing. It took five months for the government to finally step in and ‘temporarily’ nationalise the bank, by which time it had become a laughing stock.
At the time, shareholders and industry experts criticised the government for being so slow to react.
With Fannie Mae and Freddie Mac, the US government acted more quickly. Although there were reports that the lenders were in trouble for weeks before the Fed intervened, it did not let the situation get out of hand.
In an attempt to secure the lenders’ future, the US government issued a rescue plan endorsed by Congress that enabled it to provide extra liquidity to Fannie Mae and Freddie Mac and buy shares in them.
The government will guarantee the firms’ debts and has brought in new management. According to the Congressional Budget Office, the move could potentially cost US taxpayers up to $25bn.
Although the interventions are not typical nationalisations because the lenders have always been quasi-public bodies, the government has taken greater control.
It could be argued that it had to act quickly since half of all US mortgages are guaranteed by Fannie Mae or Freddie Mac. If either collapsed it would be catastrophic. Nevertheless, the move has attracted widespread praise.
“The US government had no choice but the move is a good thing because it removes systemic risk,” says Jeremy Tigue, head of global equities at F&C Investments. “It and the Fed were quick to react. Nobody lost any money, unlike NR’s shareholders.
“The credit crunch began a year ago but Fannie Mae and Freddie Mac’s problems only surfaced in June 2008. By July the government had taken action to gain greater powers. I don’t think it could have done better.
“In contrast, with NR there were several months of faffing about before the government stepped in,” he adds. “The US government has offered a complete solution.”
Although the markets have greeted the move favourably there is a downside. Just days after the rescue plans were made public, it was announced that Fannie Mae and Freddie Mac would have to sit on the government’s books.
At a time when Federal debt has spiralled and the economic indicators are mixed, the nationalisation of the firms could be considered a risky strategy.
The US government and the Fed have also taken a different approach to interest rates.
While the UK’s base rate has been held at 5% for five months despite the industry crying out for a cut, in the US interest rates have been slashed several times to keep mortgage repayments as low as possible. Rates now stand at just 2%.
“The BoE is doggedly holding interest rates at 5% because its only target is to get inflation back to Whitehall’s 2% target,” says Cleary.
“The government must either remove the BoE’s independence or give it some latitude on the target, which is unachievable in the short term anyway. We need interest rates at 4% as soon as possible.”
Interest rates are not the only area where Labour has erred on the side of caution. April saw the introduction of the BoE’s Special Liquidity Scheme – a plan to inject £50bn worth of liquidity into the banking system.
But sub-prime deals – those at the centre of the credit crunch – were exempt from the scheme, leaving industry pundits exasperated. They claimed it ignored the real problem.
Kevin Friend, strategic partnerships director at Mortgages.co.uk, said the scheme was not open to firms that needed it most, such as specialist and smaller lenders. Peter Williams, chief executive of the Intermediary Mortgage Lenders Association, labelled it as too restrictive.
On the other hand, the US has invested continually into the market with regular multibillion dollar liquidity injections. “The US has been much more proactive and innovative,” says Tigue. “The UK has been slower to move but then the situation is complicated here.”
While the US government has gone in all guns blazing, our political masters have taken a more cautious approach. But there’s a time for prudence and those who are suffering in the market would argue that this isn’t it.
Government proposals are a curate’s egg
Sue Anderson is head of member and external affairs at the Council of Mortgage Lenders
In our initial response, we described the Stamp Duty change as a curate’s egg – good in parts. Certainly the government needed to clear up the somewhat farcical uncertainty surrounding the tax created by its previous kite-flying exercise about concessions. This resulted in purchases being put on hold as consumers adopted a wait-and-see approach. At least buyers know where they stand for the next 12 months.
We like the Income Support for Mortgage Interest reform, which chimes with our protracted lobbying to restore the benefit to its pre-1995 form before the swingeing cuts that the previous Conservative administration imposed. Although ISMI is still harsher than it was then, at least lenders will have the chance to forebear in cases where eligible households will see most of their mortgage interest met after 13 weeks instead of 39.
Sadly, the government hasn’t listened to our suggestions to restore ISMI to borrowers’ pay rates rather than the one-size-fits-all standard it uses now. Nor has it chosen to consider extending the benefit to a wider range of households – for example, to plug shortfalls where one partner in a joint mortgage loses their income but the other doesn’t – in return for a possible second charge on properties, raising the possibility of the government being repaid at a later date.
In terms of the mortgage rescue proposals to be delivered through local authorities and housing associations, we are supportive in principle. But the details remain sketchy and it is important that lenders are given clear guidance on eligibility so they’ll know when it makes sense to refer households for assessment to access the scheme.
It is also notable that those households likely to be eligible will also possess equity. In a falling house price environment, the scheme is unlikely to help recent entrants suffering repayment difficulties, unless they were able to put down large deposits when they got on the property ladder. But for a modest number of more established families with children who would otherwise cost councils money to place in alternative housing, it could be significant.
Overall, then, the government has unveiled a modest set of proposals. They are helpful but perhaps not helpful enough to make a significant difference to the market. We will have to wait and see what the government will do in relation to the missing link – Sir James Crosby’s review of mortgage finance, due to land on chancellor Alistair Darling’s desk at the end of the month. But even if the government takes our advice and intervenes in funding, what is clear is that we have yet to reach the bottom of the market and do not know when it will turn. There are no clear wins here, simply damage limitation.
UK rescue plan offers some help but fails to tackle the biggest issue
Peter Williams is executive director of the Intermediary Mortgage Lenders Association
The heavily trailed housing market package Ensuring a fair housing market for all was launched on September 2 by Prime Minister Gordon Brown and secretary of state for communities and local government Hazel Blears while on a visit to Ealing, west London. It has a number of elements, reflecting the fact that interdepartmental negotiations about the plans continued almost to the last minute. The elements are:
The ISMI change is important in that it will help borrowers struggling with their mortgage repayments, but the major sting in the tail is the new two-year limit on claims.
The various buy-back schemes are also helpful, especially if they offer safer alternatives to discredited sale-and-rent-back deals. HomeBuy Direct is welcome but introduces yet another shared ownership variant, making it more difficult for brokers to advise customers of the best option.
Finally, we should not ignore the government go-ahead to local authorities to build new council housing if – and this is a big if – they have retained their housing stock. This will disallow many councils but marks an important U-turn in government policy.
The Stamp Duty holiday may boost confidence but it will do little for the market overall and is close to the existing £150,000 Stamp Duty-free level in deprived areas.
The package made no mention of the Civil Justice Council protocol on repossessions still being negotiated nor the final report from Sir James Crosby on mortgage finance. This is the big one – unless borrowers can get mortgages everything else is irrelevant. Sadly, the signals from Sir James regarding positive action are not good.
The package offers a degree of market stimulation but does not tackle the big liquidity issue. In reality it is as much about politics as economics and it pales into insignificance compared with the interventions being made in the US.
Plan has addressed demand but supply is markets biggest concern
Julia Cooper is policy analyst at the Association of Mortgage Intermediaries
The line “I’m from the government and I’m here to help” elicits cynicism among many Britons. Many react sceptically to government proposals and it would be easy to greet the package of measures introduced by Prime Minister Gordon Brown and co to kick-start the mortgage market in the same way. But £1bn has been put on the table so let’s have a look at what the government has come up with.
The proposals to reform Stamp Duty are long overdue. We would like to have seen the increase in the tax’s threshold index-linked to benefit more borrowers, but the £50,000 increase is welcome nonetheless.
But the danger of limiting the increase to one year is that it could create an artificial bubble in house prices. Obviously it is not a long-term solution. A wider review of Stamp Duty that takes into account international comparisons is needed.
HomeBuy Direct is an innovative proposal that could benefit the house building industry as it aims to give 10,000 first-time buyers access to affordable new-build housing. But not everyone wants new-build and it won’t help most borrowers. It could also present regulatory risks to brokers. The ISMI changes are welcome but are only good in parts.
One of the most eye-catching reforms deals with borrowers who fall into arrears. The mortgage rescue scheme designed to help 6,000 of the most vulnerable families to avoid repossession is interesting. But it will not help those who have acted ‘recklessly’ or ‘irresponsibly’ and is targeted at borrowers who can no longer afford their repayments.
But how are local authorities supposed to differentiate between those who can’t pay and those who won’t? As always, the devil is in the detail.
Finally, a £400m boost in social housing spending aims to deliver up to 5,500 more homes over the next 18 months. While we all recognise that social housing is an important part of the UK’s housing stock, it must work in conjunction with the private rental sector. A major increase in social housing may inadvertently affect this market – readers with long memories will recall the last time councils dabbled in mortgages and the reasons why they were eased out.
But the government has only addressed part of the problems we face, i.e. demand. The root cause, the lack of liquidity stopping lenders from lending, remains unanswered.
Chancellor Alistair Darling’s pre-Budget report will be the next high watermark for the market and the Bank of England has announced that the publication of Sir James Crosby’s review of mortgage finance has been brought forward by one month. Will they address the crux of the problem? We wait with bated breath.
US acted quickly to avert financial meltdown
Paul Muolo is the US editor of Mortgage Strategy
On Sunday September 7 the US government placed Congressionally- chartered mortgage giants Fannie Mae and Freddie Mac into separate conservatorships. It committed $100bn to each firm while removing their chief executive officers and laying the groundwork for a radical restructuring of the US mortgage market.
As part of the restructuring plan, the Treasury Department is providing capital and funding support in an effort to boost investor confidence in Fannie and Freddie’s $5.2trillion worth of debt and mortgage-backed securities.
“On Monday the businesses will open as usual, only with stronger backing for the holders of MBS, senior debt and subordinated debt,” said James Lockhart, director of the Federal Housing Finance Agency.
The Treasury has committed to purchase new Fannie and Freddie MBS, a move that will add liquidity to the mortgage bond market. It will purchase $5bn worth of agency MBS in September alone. The FHFA dismissed Fannie Mae chief executive officer Daniel Mudd and Freddie Mac chairman and CEO Richard Syron. The two men will stay on in transitional roles.
Herb Allison, former vice-chairman of Merrill Lynch, was named CEO of Fannie Mae and David Moffet, former vice-chairman of US Bancorp, will lead Freddie Mac.
“The new CEOs will be charged with examining Fannie and Freddie’s guarantee fee structure with an eye towards mortgage affordability,” Treasury secretary Henry Paulson says. “The primary mission of these enterprises now will be to increase the availability of mortgage finance.”
Lockhart placed the government-sponsored enterprises in conservatorships because of their ailing financial condition and deteriorating ability to support the market. Paulson made conservatorship a prerequisite for providing the two GSEs with quarterly capital infusions to ensure they maintain a positive net worth.
“I support Lockhart’s decision as necessary and appropriate and had advised him that conservatorship was the only form in which I would commit taxpayers’ money to the GSEs,” says Paulson.
In agreeing to conservatorship, the GSEs each issued $1bn in senior preferred stock to the Treasury. With each capital infusion, the department will accumulate more preferred stock. The Treasury will be issued warrants that give it the right to purchase 79.9% of common shares in each GSE.
Meanwhile, the firms can increase their MBS purchases by about $100bn each but their investment portfolios have been capped at $850bn through to 2009. The senior preferred stock covenants also require the GSEs to reduce their portfolios by 10% a year from 2010 until they fall to $250bn.