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CML calls for Bank of England to offer repo facility

The Council of Mortgage Lenders has called for the Bank of England to offer a repo facility as part of the trade body’s action plan to address the funding problems in the mortgage market.

It says it had developed this plan last Autumn but the authorities did not take it up at the time. The plan is part of its submission to the Crosby review.

The repo facility would use as collateral new UK residential mortgage backed securities or covered bonds. To qualify, the RMBS or CBs would first have to be sold to investors in a public issue.

The CML says this is of crucial importance, as it would ensure that the market itself is essentially delivering the solution, with the repo facility simply acting as a catalyst to restore market confidence.

Investors would take the credit risk in the usual way but the CML says the repo facility would give them confidence, and so help to break the current vicious circle.

The CML points out that this scheme differs significantly from the Special Liquidity Scheme as it is specifically targeted at new RMBS and CBs – which are currently excluded from the SLS if they contain mortgages originated after December 2007. It also specifically galvanises investors back into the market in a way that the SLS does not.

CML Director General Michael Coogan says: “If they act quickly, there is a window of opportunity here for the Government and the Bank of England to break the logjam in the housing and mortgage markets and underpin confidence in the financial system. The single biggest issue in the housing market that the authorities need to address is the lack of available funding to support new mortgage lending.

“This proposal has the virtue of being delivered through the market itself. Unlike a government guarantee, the investor keeps the credit risk. But it specifically incentivises investors, which the special liquidity scheme does not. And it can be implemented quickly, in an environment where speed is of the essence. A year into the credit crunch, there is no merit at all in waiting until the autumn before taking steps that will help the housing market to remain more resilient, and so help the overall health and stability of the UK economy.”

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