Lending may be eased by extension of Bank's Discount Window Facility
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ALAN CLEARY: DWF WILL BE INSURANCE
The Bank of England is extending its Discount Window Facility from April, which could boost mortgage lending, says Alan Cleary, managing director of Exact Mortgages.
The DWF is being extended to allow lenders to use loan portfolios to borrow gilts for 30 or 364 days in return for a fee. The more banks borrow, the higher their fee.
Previously, lenders could only borrow against new mortgage-backed securities and covered bonds.
The extension is expected to plug some of the funding gap left by the Bank’s Special Liquidity Scheme. This is due to come to an end in January 2012, when lenders have to pay back the money they have borrowed from it.
Cleary says most banks and building societies will be using the DWF as an insurance policy in case of liquidity issues in 2011 and 2012.
He says: “With the repayment of the SLS effectively damp-ening lenders’ app-etite, there is a risk of lower gross lend-ing in 2011.
“The extension of the DWF is a no-cost insurance policy for banks and societies to insure themselves from future shocks in liquidity.”
If the lenders do not repay the Bank’s loan in the designated time, it will repossess the loans.
The Bank is taking applications from interested lenders from this month but before they are approved, lenders will need to have their loan portfolios assessed and provide information on lending policies.
The Bank specifies that lenders employ a third party to audit the loan portfolio.
Cleary says only a few third parties can offer the service, Exact being one of them.
But a spokeswoman for the Building Societies Association says it doubts the scheme will have any impact on mortgage lending.
She says: “The scheme is designed as a short-term liquidity measure and not a way of raising long-term funding.”
A spokeswoman for the Council of Mortgage Lenders has also played down the impact of the DWF in boosting funding.
She says: “The DWF is intended to be used as a back-up facility only. Allowing lenders to include port-folios of loans is a positive step but is unlikely to change anything, as lenders would not expect to use it to pay back the SLS.”
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