Negotiation, Negotiation, Negotiation

UK Property Investment news and comments from Mark Harrison of

UK Government to enter securitisation market?

Posted by markharrison on April 16, 2008

One of the most popular articles I’ve ever written on this blog has been What is Mortgage Securitisation, and Why Does it Matter?

If you don’t have time to read it, here’s the 30-second summary:

  • Some lenders lend their own money to people who want mortgages
  • Other lenders do, but rather than being owed those loans themselves, or passing individual loans over to other banks, set up special-purpose “companies” whose only role in life is to “own the debt” and then sell shares in those companies…
  • … they then use the money raised from those shares to fund the next round of loans / mortgages they make.

These shares are called “mortgage-backed securities” (MBSs)… because “security” is a technical term (used more in the US than here) for “share”, and mortgage-backed is, well, obvious.
Anyway, what the BBC have just announced is that the Bank of England are going to, effectively, buy up a bunch of these mortgage backed securities, by issuing bonds (promises by the Government to pay interest, which are generally held a lot less likely to default than similar promises by individual home-owners or property investors.)

The details haven’t been announced – it’s possible the government will sell off these bonds, and then use the cash to buy up mortgage-backed securities… but more likely is that the Bank of England will simply offer to either swap the bonds for the securities (at some discounted rate), or offer a limited-period swap, where the banks have to take the securities back in X months/years time.

The problem is, of course, that while Base Rates are low, a lot of lenders simply haven’t got the cash to lend… because they have mortgage backed securities to sell, and no-one’s buying

Expect two things:

  1. A lot of people calling to “protect the taxpayer”
  2. A lot of press speculation about this, and no agreement as to whether it’s too little, too late, or too much and a big risk to all of us.

The over-riding issue, as ever, is that the government will figure out that most people don’t care about the national debt… but do care about whether they can get the mortgage they need to move house. The national debt (what the government will, one day, have to pay out) is something that our children can inherit 🙂

Of course, it’s possible that this may turn out to be a really good move – and the government, by doing this, may end up buying a lot of MBSs that go up fast in value if a slump can be avoided. And make no mistake, the key driver for the current slump is lack of lenders… not a lack of people who’d like to be buyers.


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