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White light

This week, we published a White Paper on the credit crisis. It has been produced to set out the work that we have been doing behind the scenes, the latest state of the market and where we see the sector heading. As well as providing an economic analysis of the mortgage market, it also sets out the real value added by intermediaries in the mortgage market.

While the Treasury and Bank of England have stepped forward and provided £50bn in extra liquidity, the strings attached to this deal make it less appealing than it could have been.

The current travails of the UK mortgage market have their roots buried deep in the US sub-prime debacle. However, the scenario being played out in today’s market has come about through a confluence of events which, individually, would have caused an industry problem but which collectively have gone beyond the ability of the industry to control or remedy.

The language used to describe the current turmoil helps explain some of its causes. The problem was first, rightly, described as a credit crunch. Reflecting the US problems, banks were troubled by the composition of the mortgagebacked securities they had bought, saw the rot setting in and lost confidence that the paper they were holding was indeed of the asset quality they had thought.

The second stage was the liquidity crisis. Some central bankers recognised that the market was grinding to a halt and correctly identified that the solution was extra funds. Liquidity was pumped into the market and central banks relaxed their lending criteria against which banks could access this extra liquidity.

We now find ourselves in the third and most systemically damaging stage – the confidence collapse. Banks are hoarding the liquidity they can access, partly to rebuild their capital positions and to meet regulatory concerns.

The market has lost the power to heal itself. Market participants have insufficient power to address the underlying fault lines. What the market cannot solve, public policy must if consumers are not to be the main losers.

The White Paper advances possible steps towards addressing the issues. I have always seen our work as coming up with solutions, fixing problems and, by proposing policy. The alternatives set out in this paper are “green shoots”. We look to build a coalition of the willing across industry, regulation and public policy to nurture them into sturdy oaks.

At the heart of the proposals is the desire to see a market which is more fluid than today’s, properly values risk, facilitates lending to those who require it and can repay it and which does so at a rate which is economic for market participants. The central requirements are liquidity and trust.

Chris Cummings is director general of Aifa


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