The Bank of England dashed the hopes of mortgage lenders last week when it firmly closed the door on an extension of its Special Liquidity Scheme through which it provided term funding for mortgage bonds.
Some £287bn of collateral was posted with the Bank during the SLSs brief life in exchange for £185bn of funding with a term of up to three years. The vast majority of this is believed to comprise mortgage backed securities and covered bonds some £242bn of which was issued but not placed with investors while the SLS window was open.
So it is understandable that the Council of Mortgage Lenders would respond to the closure with warnings of a huge funding gap, backed up this week by Moodys. Between the SLS and the Credit Guarantee Scheme, which provided government backing to banks senior unsecured debt, lenders will have to refinance over £319bn of debt over three years, said the CML, in addition to financing new lending.
According to Deutsche Bank analysis published by this week, SLS swaps will begin coming due in earnest in June 2011, with between £10bn and £25bn of maturities each month until January, 2012. Meanwhile, two thirds of the CGS bonds are due to mature in 2012 with the remainder due by 2014.
In light of this, the CMLs calls for further government support are understandable, as are Moodys warnings that the funding gap will put pressure on UK lenders, especially building societies. There is no doubt that the UK government was too slow to act to restart private markets in mortgage bonds unlike its prompt liquidity support, concrete programmes for funding support only emerged late last year and have so far proved unworkable.
Since September last year, originators have issued just a trickle of mortgage bonds from the UK in the absence of explicit government support. The issuance has been encouraging, but also limited to a handful of issuers and in many cases underpinned by large orders from a single investor. This week Co-operative Bank is marketing a £2.5bn RMBS, but only £350m of this is being sold publicly.
By contrast, the Term Asset Backed Securities Loan Facility in the US has had a dramatic impact on investor demand for consumer ABS, to the extent that most market participants feel that a vibrant market will survive the withdrawal of support. It has even begun to spur new issuance of CMBS, even as the sector enters a fraught period from a credit perspective. In Australia, A$8bn of government participation in new RMBS issues alongside investors has kept the domestic market ticking along, albeit at much reduced volumes.
Time to reprice
Calls for further government support, however, seem strangely out of touch at a time when jittery markets are scrutinising sovereign borrowers intensely. The UKs long term fiscal position is not that much better than some of the southern European governments about which IMF bailouts are being discussed, and an election is just around the corner.
An unsteady government is hardly likely to commit to adding yet more billions to its borrowing requirement at such a time, and besides a possible weakening of the UKs credit rating might hurt the wholesale funding markets more than a guarantee would benefit individual issuers.
The securitisation industry has already had two years to put its house in order, re-engage investors and reprice underlying assets to support higher funding costs. Politicians would be justified in wondering why the taxpayer should extend its considerable exposure even further if wholesale markets are still not viable five years after the peak of the crisis.
Regardless, the circle must be squared. If the funding markets do not significantly improve, the cost of credit will increase and loan origination will decrease. The government must bear that in mind as well.