This means that Northern Rock mortgages will no longer be allowed to go into the trust and the lender won’t receive funding from it until bondholders are repaid. This may be the reason why Northern Rock is aggressively repossessing assets and keeping its interest rates artificially high so that its public debt can be repaid ahead of schedule. This would reduce its dependency on outside funding to issue new loans.
Had the government wanted to keep vehicles like this going it could have done so by guaranteeing the assets held in the Granite trust and allowing Northern Rock to continue to pump assets into the trust as existing ones expire. By not doing so it is sending a clear message to the industry that such vehicles are no longer acceptable.
But this is a chicken and egg question. Mortgage supply was restricted for many years because lenders relied on retail deposits to fund it. The potential for supply to be further depressed if saving levels fell, coupled with deregulation of the banking sector in 1987 that allowed building societies and banks to compete across a wider range of financial services, led to an evolution of the lending model.
Instead of borrowing money from savers, lenders looked for the cash from other financial institutions. They pooled the mortgages they made into special purpose vehicles, enabling investors to buy shares in them to receive income from the loans.
While it may be true that this helped to escalate lending levels, it was also a function of the demand for innovative products, easy access to lending and increasing levels of personal debt driven by consumerism.
The media and politicians have become securitisation ‘experts’ but they cannot even begin to understand it in the detail needed to make educated judgements about the main issues.
By dealing a death blow to Granite, the government is seen to be doing something. Whether it’s the right thing remains to be seen.
Many believe that mortgage-backed securities should be used to support products in a world where supply is painfully limited but it seems that even MBS with gold-plated ratings will not receive political backing.
As the government allows Granite to deleverage its position, we must assume that Bradford & Bingley’s Aire Trust and others will go the same way.
These trusts were the growth drivers for the likes of Northern Rock, HBOS and Alliance & Leicester and in turn led to the expansion of specialist deals and greater consumer choice.
It’s safe to assume that the specialist sector won’t return to the market any time soon and the supply of lending will remain constrained for years.
With all the noise surrounding the importance of sensible lending and prudent risk management in light of the huge amount of taxpayer funding pumped into banks, it’s not a massive leap to see that any government would view propping up securitisation as an invitation to return to reckless lending. This would be political suicide so Whitehall has decided to let securitisation die.
Whitehall’s IVA U-turn is the right move
A simplified individual voluntary arrangement scheme designed to make it easier for debtors to reach agreement with creditors has been abandoned by the government.
With the number of IVAs running at four times the level seen in 2004, there is a huge demand for the service but creditors have become less flexible as the number of applications has soared.
The scheme would have cut the number of creditors needed to accept IVAs from 75% to 51%, making it more difficult for them to defeat reasonable repayment proposals.
But despite the protestations of the Insolvency Practitioners Association I don’t think this is a bad thing. Too many consumers have viewed the weakening of IVA criteria as an open invitation to abuse the rules and avoid repaying. Further erosion of IVA conditions would only make matters worse.
As the economic situation has deteriorated we have seen a huge rise in the number of unregulated debt management companies that make their money by encouraging consumers to take out IVAs.
While IVAs are an alternative to bankruptcy they shouldn’t be a lifestyle choice but a lifeline to those who genuinely need help.
This week’s pre-Budget report brought some positive news but I don’t understand the additional tax on incomes over £150,000 a year.
This is a disincentive to the entrepreneurs that chancellor Alistair Darling so often courts and will affect less than 1% of UK earners.
It is a throwback to Old Labour and the introduction of a 45% tax band will undermine the economic confidence that the government has been trying to rebuild in recent months. Good work Darling.