Crosby Report wary of more UK government intervention

In an interim report released today, Sir James Crosby, deputy chairman of the UK Financial Services Authority (FSA), warned against the government becoming more deeply involved in attempting to prop up the mortgage market.

Crosby started to research options for resuscitating the UK mortgage finance market in April this year; his final report is due alongside the pre-budget report in October.

In the interim report, released today, he warned of the danger of expanding the Bank of England's Special Liquidity Scheme. The scheme was launched in April to allow banks to swap their existing holdings of high-quality mortgage-backed securities (MBS) for UK treasury bills, in an attempt to increase liquidity after the MBS markets effectively closed down. Some industry "stakeholders", Crosby said, had suggested the scheme should also accept newly issued MBS - at present the Bank will only accept securities already owned by the borrowers at the end of 2007.

But Crosby pointed out that "the focus here is on delivering the greatest benefit to the economy and the consumer through new lending, [and so] the emphasis here is on primary market issuance". Expanding the Special Liquidity Scheme in this way, he said, might be used "by banks and building societies primarily to finance re-mortgaging. It is also debatable whether this sort of approach would help or prolong the transition to better functioning markets in the long term". The plan would also involve significant fiscal and legal risks and could endanger the ability of the Bank of England to keep inflation under control, he added.

Another suggestion, a temporary government guarantee of high-quality MBS, also received short shrift: while it could lead to increased market activity in the long term, "the extent of the impact on net new mortgage lending is less clear", Crosby wrote, warning that "a transfer of risk to the government might distort incentives and create moral hazard, rather than help investors and issuers price that risk more accurately". Any intervention would have to be matched by industry reform, he added.

The UK Council of Mortgage Lenders said it welcomed the report. CML director general Michael Coogan commented:“Without action, the situation in the housing market will be worse than it needs to be. The housing correction will overshoot, and the knock-on effects on the wider economy will be significant. Today’s analysis at last sets down an independent welcome marker that intervention to address the mortgage funding gap is both appropriate and necessary. It creates a clear expectation of measures at the time of the pre-Budget report. We now look forward to working urgently with the Treasury over the summer on proposed solutions.”

See also: BoE reveals £50bn liquidity facility 
Central banks act again to preserve liquidity