BBA's Knight Says Brown Shouldn't Guarantee Mortgage Securities

By John Fraher and Nigel Stevenson

Sept. 10 (Bloomberg) -- British banks' top lobbyist said Prime Minister Gordon Brown shouldn't guarantee mortgage-backed securities to help the country's housing market, lending support to Bank of England Governor Mervyn King.

``It's the money market we should be looking at, not that sort of government guarantee,'' Angela Knight, chief executive officer of the British Bankers' Association, said in an interview on Bloomberg Television in London today. ``I don't think it's for the government to intervene. Once you start, where do you stop?''

Brown and the Bank of England are struggling to unfreeze the U.K.'s mortgage market as the yearlong credit rout exacerbates the housing slump. The government is considering proposals that include guaranteeing securities linked to home loans. At the same time, the central bank must decide what to do when its own program to help money markets expires in October.

Chancellor of the Exchequer Alistair Darling will decide in coming weeks what steps, if any, the government should take when former HBOS Plc Chief Executive Officer James Crosby submits his final proposals. Brown's spokesman said this week that the Treasury is still waiting for the recommendations.

While Brown and Darling have given no indication of their own preferences, the worst house-price slump since the early 1990s and the ruling Labour Party's falling popularity are increasing pressure on them to act.

Mortgage Squeeze

Steps taken to date have so far failed to free up the mortgage market. Banks are holding onto their cash even after the Bank of England in April started a program allowing them to swap securities damaged by the credit rout for government bonds. That's making it harder for potential buyers to get loans and mortgage approvals fell to the lowest since at least 1999 in July.

Measures announced last week to cut taxes on home purchases and help first-time buyers have also been dismissed by estate agents as well as by former policy makers such as Willem Buiter, who said they have ``no macroeconomic significance.''

Crosby's initial report in July said the government could consider guaranteeing mortgage-backed securities or the Bank of England could extend its so-called Special Liquidity Scheme.

At the same time, Crosby said that a guarantee could create moral hazard. King said last month ``the last thing we want to do is to tell lenders it doesn't matter if they monitor the riskiness, the government will guarantee it.''

U.S. Treasury Secretary Henry Paulson was forced on Sept. 7 to seize control of Fannie Mae and Freddie Mac after the housing slump threatened to topple the companies making up almost half of the U.S. home-loan market.

Knight said the Bank of England should instead consider extending its Special Liquidity Scheme which allows banks to swap securities damaged by the credit rout for government bonds.

While the program, which expires in October, may look different in a future form ``we think that is the way to go,'' said Knight. ``That is enhancing what a central bank does. It's not government intervention.''

Buiter, who spoke on the same show as Knight, agreed that the government shouldn't openly back mortgage-related securities. The central bank may nevertheless extend the terms of its Special Liquidity Scheme to accept bonds issued this year, he said.

To contact the reporters on this story: John Fraher in London at jfraher@bloomberg.net; Nigel Stevenson in London at nstevenson@bloomberg.net.