AMI published its White Paper in April which contains four market interventions (it would be too generous, perhaps, to call them “solutions”). We see them as “green shoots” that, if properly nurtured could develop into the “sturdy oaks” that could underpin a market recovery. If, with closer examination, they were to wither but be replaced by others that were better rooted, this outcome would be welcome. It is the result, not the start, which is important… the fact of starting now, today, is the essential act.
There is no order of preference for the options explored within the paper. Indeed, it may be that only a combination of approaches will provide the trigger for the return of a properly functioning market.
The first of the options identified is to attract new sources of capital to the market. The fundamentals of the UK mortgage market are robust, today’s issue is one more of confidence than a lack of credit quality. If new sources of capital could be accessed, one of the constraints could be lifted: we propose a joint approach be made to a carefully vetted selection of sovereign wealth funds with the idea of attracting investment in the UK mortgage market.
Option two considered the role of the Bank of England in providing additional liquidity and relaxing its criteria for bank borrowing. We are glad to see that this option has manifested itself in the Special Liquidity Scheme which through extrapolation appears to be having a healthy uptake. This will take time to feed through the system, but as long as those subscribing do not use it to over strengthen their balance sheets, new cash should start to flow into the mortgage market in the last quarter of this year.
Option three seeks to address the need for market confidence through the rapid creation of a new “gold standard” for Mortgage Backed Securities, which would contain an asset mix drawn from a mixture of securities. This, if it came about on a given date, would provide a “point of singularity” which the market could build from. In addition to giving certainty about the future, the market would be able to re-price history. If there were assets which were not tradable, we see a role for the National Debt Office or Bank of England in managing them.
The final option we consider is for a re-engagement of those who used to buy MBS before the vogue for them was established. Pension funds and life offices were the largest investors in these assets but falling margins and worries over credit quality led to a loss of appetite. Regulatory comments have dampened any emerging interest in MBS from these traditional sources even though credit quality and value for money are strengthening.
In cracking the crunch there is now a very widely accepted consensus as to the diagnosis of the problem – banks and lenders need to start to hold each others’ paper once more. The tricky bit of cracking the crunch is how do you encourage them to do so?