The struggling mortgage market could take three years to re-balance itself, Sir James Crosby revealed yesterday in the Crosby Review, produced for the Treasury.

The review was launched in April in a desperate attempt to find a solution to the mortgage problem hitting the UK. Since then the credit crisis has worsened and mortgage lending has dropped by 32 per cent year on year, according to the Council of Mortgage Lenders (CML).

Lenders are reluctant to lend to each other as inter-bank lending rates (Swap rate) are high and balance sheets are weak. Speaking of the problem in his letter to the Chancellor Alistair Darling, Sir James said:

“Mortgage markets are adjusting to the shortage of funding. Lenders are seeking to re-price existing mortgages but this is a slow process which will take two or three years to run its course.

“In the meantime, it is hard to see why banks will increase their currently depressed appetites for risk. While there is still good availability of finance for those borrowers who offer significant security, the availability of finance to all other consumers is considerably reduced and likely to remain so.”

However, despite much musing, the review failed to offer any set solution to the mortgage market problems faced by the UK. Although several possibilities were referred to, including an extension of the Bank of England‘s Special Liquidity Scheme, Government under-writing and a US style agency, Sir James was quick to dismiss them.

Meanwhile, the effects of the £50billion Special Liquidity Scheme launched in April are just starting to filter into the UK mortgage market. Over the last week, the majority of UK lenders have reduced the rates on their mortgage products. Mortgage expert Darren Cook at Moneyfacts.co.uk, commented:

“There is a faint glimmer of hope that the fixed rate mortgage market is returning to some sort of normality. New mortgage borrowers are now finally benefiting from this, as lenders pass on a string of welcome interest rate cuts on their popular fixed rate deals.

“It is encouraging that, at long last, lenders are responding to the easing in wholesale borrowing costs and passing a discount on to the consumer. There is a sense that competition is finally returning to the fixed rate mortgage market, which will benefit the borrower.”

However, more needs to be done, as Sir James Crosby added: “Aside from their lack of access to new asset backed funding and despite the impact of the Bank of England’s Special Liquidity Scheme, banks are struggling to increase the amount or extend maturity of their wholesale lending.”

Welcoming the review, director of the CML, Michael Coogan, said that the mortgage market remains “severely constrained” and that lenders are unable to meet consumer demand for mortgages because there is not enough funding available to them.

“Without action, the situation in the housing market will be worse than it needs to be. The housing correction will overshoot, and the knock-on-effects on the wider economy will be significant.” he said, adding:

“This analysis (Crosby review) at last sets down an independent welcome marker that intervention to address the mortgage funding gap is both appropriate and necessary. We now look forward to working urgently with the Treasury over the summer on proposed solutions.”

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