James Crosby’s report on Monday recommended state guarantees for £100bn of new mortgage-backed securities to help get banks lending to home-buyers once again. I pointed out here that Crosby himself had reservations about this idea when he wrote his interim report in the summer.
Treasury officials tell me that the situation has become more desperate since then. But surely the fundamental pros and cons remain the same.
Mervyn King seemed unimpressed with the idea when he spoke on Tuesday, describing securitised mortgages as a ”form of lending that for rather good reason has fallen out of favour”.
The final Crosby report says the government guarantee would only be used for new mortgages, not for re-financing existing ones. It would be available to banks and building societies. Only “prime” mortgages would be eligible: excluded are high loan-to-value loans, second charge loans or those to people with impaired credit histories.
How else would taxpayers be protected? The answer seems to be the ratings agencies.
“The guarantee would only be available for assets rated by at least two credit rating agencies as AAA/aaa, and which would be senior in ranking to all other tranches in the securitisations….according to industry esimates, AAA rated RMBS would only default if house prices fell by more than twice as much (than) in the 1989-96 period.”
Crosby still has faith in the omnipotence of the ratings agencies, despite their recent fall from grace. Others may not.
Alex Barker pointed out last month that the same blind faith in the agencies remains when it comes to the £200bn “special liquidity scheme”:
“The Bank of England is allowing hard-pressed banks to take the assets they are unable to sell in the market and swap them for crisp, clean Treasury bills. The big question is: how is the Bank valuing the collateral if no one in the market is willing to put a price on it? The Bank argues the exposure to the taxpayer is limited. First, they only accept AAA rated securities…..(but) after everything we have discovered about rating agencies, why is the Bank ready to accept a security simply because it is marked AAA?”
Remember: these are the same ratings agencies which Gordon Brown has criticised for their failure to prevent the credit crunch.
The second layer of protection recommended by Crosby is that there would also be recourse to the lender if a guarantee was called. His report says confidently: “The government would only be exposed in the event of a double default, ie on both the paper and the issuer.”
A year ago this kind of promise looked copper-bottomed. Since the demise of Northern Rock and Bradford & Bingley and the part-nationalisation of RBS, Lloyds TSB and HBOS, it does not.
Jim Pickard
Kiran Stacey
