Proposed Grading Of Mortgages Unveiled

It looks like the Chancellor of the Exchequer will announce a new system of grading mortgages available in Britain. Mortgages that are considered the least prone to fail will be given an official seal of government approval.

These changes are designed to open up the wholesale mortgage market. It is expected that the Chancellor will include this announcement when he delivers his budget day speech.

What the Chancellor is proposing is to; in effect create a kitemark for mortgage and securities based on transparent standards for investors, as well as credit worthiness of the loans, and high quality financial backing.

The reason for these proposed changes is to avert an American-style sub-prime mortgage lending debacle. The proposals also aim to remove a freeze in the market for, what are known as mortgage securitizations. Were mortgage lenders sell off packages of mortgages to other long-term financial investors. This has a knock-on effect of relieving serious funding problems that might possibly cause lenders become short of cash, and therefore have trouble financing mortgages for borrowers.

The basis of the proposals is to set out clear and viable criteria, related to areas such as loan-to-income ratios, loan-to-value ratios, and statistical, borrowers, credit histories, to minimise defaults rates. The Treasury is set to publish the final proposals around March 12th. There will then be a consultation period before all the details are finalized. One of the big question marks hanging over the scheme is to will be in charge of administering it.

The Financial Services Authority seems like the obvious choice, but it is thought that investors possibly will not trust an industry standard. Even one that comes from the Financial Services Authority, and there are concerns that there would still clearly not be any guarantees that the number of defaults on mortgages may still rise.

Another problem is just how stringent the definitions of good quality lenders would be worked out. MPs and the financial institutions have a vested interest in ensuring that as many borrowers as possible can be classified as creditworthy. It is believed that to be truly successful the scheme will need mortgages to be kitemarked as a solid investment.

British mortgage lending companies who are lacking funds to finance mortgages would have a lot to gain from a good kitemark certification system. It is thought that this would attract companies with large liquid assets such as insurance houses or pensions administrators who would provide funds as a long-term investment.

Back in 2004 the Miles Review looked into mortgage financing and came to the conclusion that a kitemark system would be beneficial in attracting investors from the EU. The idea would also make bonds come into line with EU directives, which would allow funds to make large investments into mortgages.
The banking industry is unsure if such measures will work in the short term. But also states that more transparency can only be an improvement, and may increase confidence for investors.

If the scheme could work and could boost investor confidence, it is believed that loans that do not have kitemark certification may still be a good credit risk. It would also offer the companies with uncertified mortgages and equal opportunity of acquiring additional funds.

The Chancellor is banking on the kitemark to boost funds for mortgage companies to avoid a situation where cash restraints caused a massive slowdown in the housing market. With ripple effects through the whole of the British economy.