HM Treasury
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Mortgages initiatives
Following the Prime Minister's statement today about the need to take further steps to improve the way that the mortgage markets works, the Chancellor of the Exchequer, Rt Hon Alistair Darling MP, has announced a number of new initiatives to ensure that lenders have the best access to capital market finance, and consumers are able to take the most informed choices when buying a mortgage.
Speaking in the House of Commons today, the Prime Minister announced that the Chancellor will consult on creating a new regime for covered bonds which will help mortgage lenders finance more affordable 20 to 25 year fixed rate mortgages. The Chancellor will report by the Budget on how to overcome any barriers preventing lenders from offering people long-term mortgages, including the case for changes to instruments used by the Debt Management Office.
Today's announcements include:
* new legislative proposals, published next week, for a covered bond regime in the UK to assist mortgage firms to finance their lending over the longer-term. The proposals will enable firms to take advantage of the special status that covered bonds, which satisfy certain criteria, are accorded under EU law, and will give lenders greater opportunity to participate in the covered bonds market, worth over Euro 1.5 trillion in Europe, and ultimately enable them to finance more affordable longer term fixed rate mortgages;
* a Treasury led review to identify any further barriers to lenders wanting to raise funds in wholesale markets. This is specifically aimed at lenders wanting to offer both competitive longer term fixed rate mortgages, and a wider variety of housing finance products. The Treasury, working closely with the financial services sector, will report on its findings at Budget 2008; and
* Government backing for a Private Members Bill, currently before the House, which will increase the proportion of funds which may be raised in wholesale markets, giving building societies more flexibility in financing their mortgages.
Further details of these proposals will also be set out in the Government's housing Green Paper due to be published shortly.
NOTE TO EDITORS
1. Covered bonds are a class of corporate bond issued by credit institutions and secured against collateral, typically mortgages and public sector loans. Credit institutions are already able to issue covered bonds in the UK, and are doing so. However, not as many bonds have been issued in the UK as elsewhere in the EU.
2. The proposed legislation will mean that issuers can take advantage of the special status accorded to covered bonds under EU law (Undertaking for Corrected Investments in Transferable Securities Directive and the Capital Requirements Directive), and adjust the risk weightings accordingly. This should help issuers to access the large EU market in covered bonds and issue more bonds. It will also help them match borrowing and lending over the longer term.
3. The terms of reference for the Treasury review will include an assessment of:
* the supply of and demand for financial instruments to allow the risks of mortgage pre-payments to be hedged efficiently. This will include an up to date assessment of whether the DMO could use 'swaptions' (a financial instrument that gives the holder the option - but not the obligation, at a point in the future, to enter into a swap contract, at an interest rate that is agreed now) to better manage the Government's debt portfolio;
* the rapidly developing residential asset backed securities market, and assessing whether there are remaining obstacles or inefficiencies preventing further improvement in liquidity allowing securitisation to become a greater source of housing finance; and
* the recent financial innovations aimed at re-packaging housing and funding related risks which tend to be aimed at people on higher incomes, and assessing whether there may be important obstacles that prevent these opportunities from becoming more widely available.
4. There is a statutory requirement on building societies to raise at least 50 per cent of their funds in the form of shares held by individual members of building societies. The Government is supporting a Private Members Bill currently before Parliament, which proposes to increase the proportion of funds which may be raised from sources other than individual's shares up to 75 per cent. This will give building societies greater flexibility to raise funds in wholesale markets, if they wish to do so.
5. Non-media enquiries should be addressed to the Treasury Correspondence and Enquiry Unit on 020 7270 4558 or by e-mail to public.enquiries@hm-treasury.gov.uk
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