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Lenders face a dilemma

What a year it’s been. Of course, 12 months ago it was already clear that 2008 would be difficult, to say the least. Wholesale funding markets were paralysed – as they still are – and most of us were expecting a sharp reduction in house price growth. But nobody predicted a near-collapse of the financial system and the nationalisation of several banks. The economy is now much weaker than we expected at the start of 2008 and consumer confidence has collapsed. So, the real issue for 2009 is how to keep nearly 12 million borrowers secure in their homes.

The pre-Budget report made a modest contribution to that, but not a decisive one. Instead of seizing the opportunity for a significant expansion of income support for mortgage interest, chancellor Alistair Darling merely tweaked his proposals a bit.

It’s true that more than 80% of mortgages are now below the new proposed upper limit for ISMI of £200,000 but other restrictions mean that the overall numbers qualifying for state help in a reasonable timescale will remain small. The Department for Work and Pensions estimates that only 10,000 households would be helped.

So, what else was there in the pre-Budget report to help keep owner-occupiers in their homes as the economy worsens and unemployment grows? Well, there was an extension of the limited mortgage rescue scheme to include second charge loans. However, the scheme still only covers a few thousand customers at risk of homelessness, not most borrowers facing repossession.

A new lending panel has also been appointed to monitor the mortgage market. The CML will have a full and constructive role on that panel and I attended its first pre-meeting the day after the pre-Budget report.

And there is more funding for debt advice. As we said after the chancellor’s statement, it’s very helpful and it’s very modest.

Our response to the pre-Budget report also highlighted the difficulties faced by lenders trying to deliver the government’s mixed aspirations. It would be more helpful and realistic if the government were to acknowledge that there are inherent conflicts in asking lenders to improve the flow of lending, be more lenient with borrowers in arrears and improve their capital positions, all at the same time.

Jeremy Warner summed the situation up neatly in The Independent.

“The Tripartite Authorities seem to want it both ways,” he wrote. “They want more and less lending at the same time. The message is not so much mixed as entirely contradictory.”

Accepting that there are conflicts does not mean that we cannot try to make progress in different directions. A more realistic assessment of the challenges would place the government alongside Bank of England governor Mervyn King. Last month, he told the Treasury Select Committee that while lenders were taking sensible commercial decisions individually, their cumulative effect was bad for the economy and ultimately for lenders themselves. I agree.

The government, the Bank, the Financial Services Authority and lenders should be able at least to agree on the nature of the policy issues and conflicts that confront us. We support the view expressed by King that the single most pressing challenge now is to get institutions lending again.

If there is a consensus on the need for decisive action to restore lending – and there surely is – the reaction so far to the Crosby report has been disappointing. Given the sense of urgency and that it was promised in September, why delay publication until the pre-Budget announcement? And why, now it has finally been published, is there no obvious desire on the part of the government to pick up the pace?

There is much to commend in the report. It reflects our view of the problem and also our suggested solution, first put forward in autumn 2007. We support the central recommendation that the government should offer a temporary guarantee on residential mortgage-backed securities and covered bonds backed by new loans for house purchase totalling around £100bn in the next two years.

This would be open to all lenders, including those in the buy-to-let sector. Firms would pay the government for the guarantee and the government would then have recourse to lenders to recoup claims. The proposal is that only AAA-rated securities should qualify so the risk of a guarantee being called on is low.

But the response of the government has been lukewarm. It has said it will work up a detailed scheme based on the recommendations and seek state aid approval.

In a guarded statement, the chancellor has also said that it is not yet clear how far the measures already taken will mitigate the risks to the mortgage market highlighted in the report. We believe – and Sir James agrees – that there must be further intervention to improve mortgage funding or we risk negative net lending figures in 2009.

It looks like the government has not yet taken a firm decision to implement Crosby’s recommendations and would like to keep the report as an option that can be implemented if the market fails to improve in response to bank recapitalisation.

The Bank has already said the premium being sought by investors in RMBS is way in excess of the associated risk – a clear sign of lack of confidence in the market. One view is that the longer we leave it, the more difficult it will be to kick-start the wholesale funding market. If the government is serious about doing everything it can to help home owners in 2009 it should show more urgency in adopting the Crosby recommendations.


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