Darling Should Rule Out Fannie Mae-Style Agency, Report Shows

By Reed V. Landberg

July 29 (Bloomberg) -- The U.K. Treasury should rule out creating a government-backed agency like Fannie Mae of the U.S. to bolster mortgage funding, a study for Chancellor of the Exchequer Alistair Darling will show today.

Former HBOS Plc Chief Executive James Crosby, who was asked by Darling in April to consider improvements to the home-loan market, will say it would take too long to create such an agency. Fannie Mae and Freddie Mac are private companies with a government guarantee that own or back about half of the $12 trillion in mortgages in the U.S.

``Much has been said about the case for launching a U.S.- style agency, but it seems unlikely that it would be right to tackle this century's problems with last century's solution, particularly given the time it would take to create such an agency,'' Crosby's report will conclude, the Treasury said.

The report leaves open all other options for unfreezing mortgage lending in the U.K. after the collapse of the subprime market in the U.S. last year. House prices in Britain are falling at their quickest pace since the end of the last recession, curbing economic growth and hurting the popularity of Prime Minister Gordon Brown's government.

Crosby will say that doing nothing remains an option, since some measures would do more harm than good, according to the Treasury, which released an excerpt of the report before its publication at about 9 a.m. in London today.

Credit Crunch

Banks granted 21,118 loans for house purchases in June, down 67 percent from a year ago, according to the British Bankers' Association. House prices fell 6.3 percent from a year ago in June, the most since 1992, according to Nationwide Building Society.

The panel led by Crosby, who was head of Britain's largest mortgage lender until 2006, includes central bankers, industry regulators, government officials and executives. He will deliver his main conclusions in October.

Crosby, 56, also serves as a director at the Financial Services Authority, Britain's banking regulator. HBOS is the third bank in the U.K. this year to struggle to raise cash as falling home prices and a decline in lending hurt profit.

Its underwriters, Morgan Stanley and Dresdner Kleinwort Ltd., were forced to take 2.5 billion pounds ($5 billion) of HBOS shares last week after a rights offer failed to attract enough shareholder support.

Help for Homeowners

Darling asked Crosby to find ways to limit the impact of a global surge in credit costs triggered by the collapse of the U.S. subprime mortgage market. The government also wants to help people on low incomes, the core of Labour's voter support, to afford a home loan.

Brown's popularity has declined along with economic growth and house prices, prompting his own lawmakers to question whether he can lead the Labour Party into the next election. Labour had the support of 26 percent of voters compared with 45 percent for the Conservatives, according to a YouGov Ltd. survey of 2,120 voters conducted online July 23-25.

Mortgage lenders have called on the government to extend the Bank of England's so-called Special Liquidity Scheme, which was introduced in April to encourage interbank lending.

While the cost of borrowing money has declined since then, financial institutions are still reluctant to make loans and that's threatening to exacerbate the country's worst housing- market slump since the start of the 1990s.

King's Plan

That plan, drawn up by Governor Mervyn King, allows banks stung by the credit-market rout to swap mortgage-backed securities issued before this year in return for government bonds. The Council of Mortgage Lenders wants the authorities to expand the plan by accepting securities issued in 2008.

Such a move would ``help to improve the flow of funds available for lending to mortgage customers,'' the CML and 11 other industry representatives said in a letter to the Financial Times on July 26. A Bank of England spokesman declined to comment.

Higher lending rates may help tip the U.K. economy into a recession. The Bank of England will probably say today that mortgage approvals dropped to the lowest since at least 1999 in June, a Bloomberg News survey of economists showed. Those figures are due for release at 9:30 a.m.

Last month, the cost of a U.K. home loan fixed for two years rose to 6.63 percent, the most since 2000. The central bank has cut its benchmark rate three times since December to 5 percent.

In the U.S., the Federal Reserve has already expanded some of the programs it introduced in response to the credit crisis. Chairman Ben S. Bernanke, seeking to allay renewed concerns over the health of the nation's financial system, said on July 8 the Fed may extend its emergency-loan program for investment banks into next year.

To contact the reporter on this story: Reed Landberg in London at landberg@bloomberg.net