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bail-out (phase two) begins

Phase two of the Government's bail-out of banks and wider economy has begun. If it works, there should be a big increase in mortgage lending over the rest of the year. If it fails the property sector will stay depressed for a long while yet.

bail-out (phase two) beginsForeign banks went home

A clearer analysis of the structural failings of the mortgage market is now emerging from the Government. Chancellor Alistair Darling told the House of Commons: "Over the last 10 years, lending by foreign banks and non-bank institutions accounted for over half of new corporate loans and 45% of new mortgages here."

United States banks are now unable to be directly involved in the UK home loans market, or by lending on the wholesale markets to UK lenders, because of the scale of their losses from bad debts on US home loans. European banks have also had to pull-back from the UK to focus on their domestic markets.

Action, man

What is now needed, says Chancellor Darling, is "coordinated international action". But many observers believe that the response internationally has been too limited and too piecemeal to be truly effective. Above all, the US banks remain in crisis, with rescue packages on hold while the country waited for the inauguration of President Obama.

Darling hopes that the latest package of measures announced by him and his ministerial colleagues will at least improve the UK lending environment - not only on mortgage lending, but also for small firms and larger businesses, to restrict large scale company closures and job losses.

A key element of the action plan is the creation of a £50bn fund that will buy corporate assets from the banks, giving them funds to increase lending. The other central part of the package is the Asset Protection Scheme - an insurance fund through which the Government will underwrite potential losses on banks' securitised assets.

Amazing scale

The scale of the problem was highlighted by recent comments from the chief executive of Lloyds TSB, Eric Daniels, who said that he believed total bank losses on dubious assets stood at $2,000bn to $3,000bn, whereas banks had so far only written down about $800bn of losses. This helps explain both the continued fall in banks' share prices, but also the reluctance of banks to deplete their capital base by lending at former levels.

While the Asset Protection Scheme may provide greater confidence to lenders and assist them in increasing lending, it opens up the risk of UK taxpayers potentially accepting massive losses. It may also fail to plug the hole left by the overseas banks that have withdrawn from the UK market.

A third element of the mortgage lending rescue package is a change of instruction to the nationalised Northern Rock bank. It has been told that it is no longer required to run-down its mortgage book and urgently refund money to the Government. Instead, new guidelines will be developed to encourage it - and other mortgage lenders - to increase lending. This will include "prudent lending to creditworthy customers" who can afford mortgage deposits of less than 25%, says Darling.

Mortgage rescues in place

Meanwhile, the previously announced mortgage rescue scheme is now operational. The £200m support provides assistance to mortgage borrowers on incomes of less than £60,000 a year, who would be entitled to be re-housed under homelessness legislation if their homes were repossessed. It affects people who are elderly or disabled and families with children.

Under the mortgage rescue scheme, borrowers will be able to sell their home to a housing association, renting it back, or else sell a share of it to the association, to reduce their mortgage payments. The scheme should help about 6,000 households facing repossession over the next two years. It was initially trialed in 80 council areas, but has now been extended across all of England.

Mortgage relief, too

In addition, the Income Support for Mortgage Interest (ISMI) scheme has now been extended, reducing from 39 to 13 weeks the period of unemployment before homeowners can receive financial support towards their mortgage payments from the Department of Work and Pensions. A further scheme, the Homeowner Mortgage Support Scheme, is being developed with mortgage lenders that would allow borrowers who have unexpectedly lost income to defer part of their repayments for up to two years.

The supply of social housing for people who can no longer obtain mortgages is also to be increased. Local authorities will be given the freedom to build much more new council housing under new proposals.

Lending still falling

The depth of the crisis in mortgage lending was underlined, though, by the latest figures from the Council of Mortgage Lenders. Gross mortgage lending in December fell to £12.6bn. This was an 11% fall from November's £14.2bn lending and a 47% drop from the levels of a year before. For 2008 as a whole, mortgage lending fell to £256bn, a 30% fall on the £364bn in 2007.

CML welcomed the latest stage in the Government's attempted rescue of the mortgage lending markets. Director general Michael Coogan said: "At long last, the Government has announced a comprehensive and co-ordinated package of measures sufficiently large in scale to have an impact on improving the flow of new lending."

But Coogan warned that further measures would still be needed to improve lenders' liquidity and capital concerns. "A mortgage market solely funded by a few large banks and building societies would be unlikely to have the capacity to match future consumer borrowing demand, or be as competitive in the long term as the UK market has been before the credit crunch," he explained. "Increasing the range of active lenders and funding capacity in the market overall is a vital next step."

Reversing the downturn

The Home Builders Federation was also positive. The moves "could finally start to reverse the downturn in the housing market", it said, providing lenders back them.

John Stewart, director of economic affairs at the HBF said: "This is a positive move by government to address the key issue affecting the housing market, namely the lack of mortgage finance. The Government must now work with lenders to ensure banks use the facility to assist beleaguered home buyers. Restoring sensible levels of mortgage lending is absolutely critical to any recovery, and if combined with further measures to assist first-time buyers, and steps to get new home building sites started, should make a real difference to the housing market and thus the wider economy."

  • by Paul Gosling
    22 January 2009
Darling hopes that the latest package will improve the UK lending environment - not only on mortgage lending, but also for small firms and larger businesses, to restrict large scale company closures and job losses.