Base rate tinkering is not good enough

I recall speculating three years ago about a tidal wave of capital that would be unleashed on the mortgage market in 2008, as well as envisaging a considerably livelier business environment than we are experiencing.

As I saw it, the problem was that as a result of the Basle II agreement, truckloads of cheap money would be released by big lenders at the expense of smaller players.

I thought Basle II would change the way the banking system measured risk and offer a more sophisticated approach that would allow astute players – yes, Northern Rock included – to reduce the amount of capital they held in reserve to cover bad debt.

So I, along with many lenders, asked the Fi-nancial Services Authority if it would regard such a flood of cheap capital as a distortion of the market and regulate the funds that would become available.

After many phone calls and emails, I was pompously informed that the regulator does not respond to speculative or hypothetical questions about what might or might not happen.

Perhaps it had a similar perspective on liquidity and NR. Bizarrely, NR was granted a waiver by the FSA under Basle II for its sophisticated approach to risk management just months before the run on its branches.

Now, instead of being awash with funds, the system is creaking and the difference between prediction and reality beggars belief.

The Bank of England’s 0.25% base rate cut earlier this month was a paltry measure in the face of the problem that faces the market.

Michael Coogan, director-general of the Council of Mortgage Lenders, hit the nail on the head when he said the cut was good news for borrowers with tracker mortgages but added that in dysfunctional market conditions, the base rate is not a reliable guide to the cost or availability of funds.

Coogan explained that to improve the lending market and restore consumer confidence, the BoE should coordinate successive base rate cuts with further injections of more widely available liquidity.

Tim Fletcher, sales and marketing director at Baseline Capital, put it more bluntly when he described the Monetary Policy Committee’s decision as irrelevant, arguing that the BoE has effectively lost control of retail interest rates, which have become decoupled from the base rate.

The lack of mortgage funds is being reflected in house prices, but even a fall in prices is not necessarily good news for aspiring first-time buyers. The scarcity and higher cost of mortgages is squeezing affordability so prices will have to fall a lot further or liquidity will have to improve dramatically before the market reaches equilibrium.