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Easing the exit

One of the key differences between the UK and the US’s quantitative easing programmes is that virtually all of the Bank of England’s purchases have been gilts whereas the US Federal Reserve has used a lot of its ammunition to buy residential mortgage-backed securities.

The US action has forced down the yield on RMBS and the rate at which new 15 and 30-year fixed-rate mortgages have been offered to US homeowners.

The large fiscal stimuli of various types have been a major factor in stabilising markets. Despite that, although the US housing market started falling before ours, and our market bottomed out around March, the US housing market is only just showing signs of stabilising.

This is because it was in much more trouble than ours, partly due to very lax mortgage regulation, but also a major factor was the fact that mortgages in the US are issued on a non-recourse basis. If a property falls below the value of the mortgage and is repossessed, the lender cannot pursue the borrower for the shortfall. It is hard to think of a better incentive to encourage borrowers to walk away from the property when its value falls below the amount of the mortgage.

The next challenge will be what happens when the various stimulus programmes are withdrawn. In addition to considering how to wind down purchases of RMBS, the Fed and the Obama administration are studying whether to let a first-time homebuyers’ tax credit of up to $8,000 expire as scheduled at the end of November. Withdrawing both measures too soon might stifle the housing market recovery by depressing sales and pushing up yields on RMBS and hence interest rates on new mortgages. A weaker housing market would dampen the economic recovery, bearing in mind that residential construction and home sales have led the way out of the previous seven US recessions.

As our own QE programme looks set to continue until at least the end of October, this is likely to be one of the first major tests for policymakers on an appropriate exit strategy to reduce the market’s reliance on government support without killing the recovery.

Ray Boulger is senior technical manager at John Charcol

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