I spent the day of the Budget in the British Library, not among the books but with mortgage lenders who, encouraged by Tony Ward, vice chairman of the Intermediary Mortgage Lenders Association and chief executive officer of Home Funding, had set aside their differences to talk about the biggest challenge facing the industry since the Northern Rock crisis.
Put simply, the mortgage market and therefore the economy faces a decade of instability unless the government addresses the funding gap caused by the locking up of wholesale money markets that wiped out specialist lenders.
The problem hasn’t gone away. Indeed, it is set to be exacerbated by a possible refinancing crisis as lenders prepare to replace £440bn of maturing debt, the Bank of England pulls its Special Liquidity Scheme and credit guarantee arrangements schemes and low interest rates play havoc with the building society business model.
Ward described the British Library conference as the first public outing of the Mortgage Funding Group which he has brought together to define the scale of the funding problem and put pressure on the government.
The good news is that the Financial Services Authority has acknowledged the problem and the conference was a response to this. Indeed, the FSA has quantified the problem and even offered a solution, saying that “if public issue securitisation can be restarted this could contribute to closing the gap”. If only it was that easy.
Speakers were concerned at the scale of the problem given that replacing government debt will be a priority for financial institutions around the world and even if the wholesale market is resurrected competition for investor funds will make things difficult.
Given the volume of maturing government debt there is a case for extending the Special Liquidity Scheme and for regulators to work with lenders to make securitisation attractive to investors again
There were other misgivings too. Robert Plehn, head of securitisation at Lloyds Banking Group, colourfully referred to “regulators fighting jungle warfare with desert equipment” and Rob Thomas, senior policy adviser at the Council of Mortgage Lenders, highlighted how government intervention has distorted the market.
As if to compound these worries Lynda Blackwell, the FSA speaker, then gave a bog-standard presentation on the findings of the Mortgage Market Review instead of focussing on the impact this will have on funding. Either she’d been briefed incorrectly or she’d turned up to the wrong event. At the end of the day the consensus was that a business model based on retail funding is as vulnerable as one based exclusively on wholesale funding and that given the volume of maturing debt there is a compelling case for extending the SLS and for regulators to work with lenders to make securitisation attractive to investors again.
Of course, none of this was addressed in the Budget. Rather, the chancellor adopted a Tory proposal for a Stamp Duty holiday on homes under £250,000 thereby stimulating mortgage demand without lifting a finger to increase supply. Clearly, this issue will always fall victim to political expediency whoever is in power and whatever the cost to the economy.