Even UK guarantee can’t stop housing crash

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: Britain needs to reflate its mortgage markets to save its economy and its banks. Problem is, few want to borrow and there is precious little money to lend.

British property prices are down about 15% in a year and mortgage approvals are down 52%. Given the freeze in the securitisation market and the scarcity of savings in Britain, new net mortgage lending may even fall below zero in 2009, according to James Crosby, former head of UK mortgage bank HBOS, who authored a government report on the mortgage market.

While the Crosby report rightly points out the damage that such an unprecedented fall would do to employment and the economy, it is also worth pointing out that it would be dire indeed for another segment — the banks, which ultimately will suffer the losses as borrowers fall into negative equity and default or lose their jobs and default.

Britons simply don’t save enough to supply their banks with enough to lend to fund the debt requirement implied by their housing prices. That circle was squared in the old days by borrowing money from abroad, either through banks borrowing and re-lending or via securitisation.

The solution to this advocated by Britain, as laid out in the Crosby Report and endorsed by finance minister Alistair Darling, is to plaster a government guarantee on up to 100 billion pounds of mortgage securities.

The securities would only contain house purchase loans and would be highly rated by, you guessed it, the same agencies that rated the old, now discredited stuff. The securities would also exclude nasty high loan-to-value loans, or loans made to people who have already demonstrated they are not that good at paying back money.

The theory is that investors may not want to buy mortgage backed securities, which look a bit dubious given the expected fall in house prices, or lend to British banks, which look a bit dubious for the same reason and several others, but will be very happy to buy bonds that while backed by the British government pay a fair whack more than government debt.

Oh lord, make us savers but not yet