Why the Government’s mortgage plan was doomed to fail

by John Fitzsimons on 14 July 2009  |  6 comments
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The Government has been given a well deserved kicking for its daft plans to get lenders active again.

At the start of the year, the bods in the Treasury finally got their heads around how a securitisation market works. It's a fairly simple model - lenders package up a collection of mortgages as a securitisation, and sell them to investors. Easy.

And since Northern Rock hit the buffers in 2007, that market has effectively closed. As a result, lenders have less funding for new mortgages, and everything comes to a bit of a standstill. We've been through this before.

Anyway, after more than a year of lobbying from pretty much everyone associated with the mortgage industry (as well as Sir James Crosby, who was commissioned to report on how to fix the ills of the mortgage market, back before his name was mud in Government circles),  Alistair and his team finally gave in. They would issue a form of Government backing for these securities.

This was important, because the rating agencies had been completely discredited - they had been giving AAA ratings to any old rubbish - and without some form of Government assurance, no investor was ever likely to take a punt on a securitisation.

The trouble is, they limited the scheme. Only certain lenders - essentially the banks and building societies you see on the high street - were eligible, and only certain loans could be used.

To say this missed the point is something of an understatement. It is the specialist lenders that relied on the securitisation market in order to function that needed to be eligible for these guarantees. Leaving them out completely defeats the object of the scheme.

The Communities and Local Government Committee has just published a report into the credit crunch, and its effects, which is well worth a read (it's in PDF form). As part of its investigation, it looked at the asset-backed guarantee scheme, and has criticised its current structure for exactly these reasons.

My favourite part of the report is a quote by John Heron, who is a director of the Intermediary Mortgage Lenders Association, a trade body which represents many of these specialist lenders. He is also the managing director of buy-to-let lender Paragon Mortgages, and extremely well regarded in mortgage circles.

He is quoted as saying: "There is only so much risk that a government-sponsored scheme can reasonably take, and that is the position they are in, but the problem with that is that it is rather like half a leap across a chasm: very impressive but doomed to failure... unless the scheme is improved, it will not do anything, I am afraid, to support mortgage lending."

That's hit the nail on the head, for me. A well-intentioned scheme, but one devised by people with terrifyingly little understanding of how the mortgage market worked.