The nationalisation by the American government of stricken home loan providers Fannie Mae and Freddie Mac should inject some life into the British market, says new research.
Analysis from the Centre for Economics and Business Research (www.cebr.com) points out that the move provides as much as $200 billion in tax payer money in the form of purchasing mortgage backed securities from the two mortgage giants, as well as offering to inject a significant amount of capital, if needed.
CEBR experts expect the move to be worth a fall of about one percentage point in the United Kingdom’s fixed mortgage rate. Since the announcement, HSBC already has cut its standard two, three and five year fixed-rate loans by 0.56 percentage points.
According to the study, ‘One of the consequences of the credit crunch was that there had to be heavy government intervention to boost the confidence in the financial markets across both sides of the Atlantic. The Bush administration has taken the lead with the “if it needs to be done, we will do it and we are ready to give what it takes” attitude.
‘It began with aggressive rate cuts by the Federal Reserve to quell the recession. The Fed also stepped in to rescue Bear Sterns bank and to inject liquidity into markets. The government was quick in passing a fiscal stimulus package and tougher regulations to curb risky lending. Takeover of Fannie and Freddie can be seen as part of that tradition.’
The latest move is not only about rescuing Fannie and Freddie, the study adds. By guaranteeing mortgage-backed securities, the Federal government should provide a fillip to the housing market as the spread between mortgage and Treasury rates narrow in response to lower rates.
The Fannie and Freddie bail-out will mean a stronger United States economy. Second, and perhaps most important, the government is demonstrating leadership by example.
Meanwhile, CEBR reports that conditions in the United Kingdom financial and housing markets have deteriorated. Mortgage lending is down by about 70% and current policies in place by the Treasury and the Bank of England are unlikely to have a significant impact to reverse the trends in the housing market.
The American move will up pressure on Alistair Darling to be as radical with our mortgage markets, the report suggests.
Two of the options being considered by the Treasury are: providing a similar guarantee for mortgage backed securities; and extending and expanding the current special liquidity scheme to help banks increase their mortgage lending.
‘We await the publication of Crosby’s final report, but the nationalisation of Freddie and Fannie increases the odds of the government under-writing new mortgage-backed security issuance in the United Kingdom. In our view, this represents the best chance of the United Kingdom housing market recovering in 2009,’ the study concludes.