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The month at a glance

The above-mentioned statement by foreign secretary Miliband to recognise Chinese rule over Tibet destroyed at a stroke the Dalai Lama’s negotiating position and led to speculation that the UK decision was linked with Prime Minister Gordon Brown’s efforts to bring China into a new world economic order.

According to the BBC’s world affairs editor John Simpson, Zhu Weiqun, the Chinese official leading the talks with Tibetan exiles, had diplomatically sidestepped the question of whether the British decision had been linked with Brown’s efforts to bring China into his vision for a global recovery but that’s the way it played out on the internet.

The rumour machine was aided and abetted by the fact that the PM has been urging China to make a larger contribution to the International Monetary Fund, offering in exchange added weight to China’s voting power in that institution.

Given China’s own problems this may be wishful thinking but it subsequently pledged a fiscal stimulus package worth $586bn – equivalent to 15% of its GDP – to ride out the financial crisis, thereby doing its bit for the recovery of the global economy.

This was ahead of the leading economies’ ‘G20’ mid-November summit in Washington and also the PM’s visit to Riyadh earlier in the month when, as economic genius and world statesman, he allegedly persuaded Saudi Arabia to help stricken economies by pledging more money to the IMF.

Of course, Brown is trying to position the City as a natural home for Islamic finance and Middle East sovereign funds, but given his government’s Islamophobia in matters of security it will be interesting to see how this pans out. And Islamophobia is not the only issue. As Ahmed Suleiman points out on page 20 of this issue: “The Gulf states have been aping the stock markets, derivatives and the hedge fund strategies of the West so as the recession unravels we will also see the unravelling of the economies of these countries.”

Indeed, as The Times on November 27 was reporting the Financial Services Authority as saying that Islamic finance will play an important role in UK financial services, in another part of the paper it was being reported that a government-backed mortgage company, Abu Dhabi Finance, had been launched in an attempt to revive the ailing property market in the United Arab Emirates.

The Times stated that this development echoed a similar move the previous week when the Emirates Development Bank was created – a £5.2bn lender formed from a merger of the state-owned Real Estate Bank and Dubai’s two major mortgage lenders, Amlak Finance and Tamweel, both of which suffered a loss of liquidity in the credit crunch.

Perhaps a better indication of which way funds will be flowing in the future came the following day when Dubai International Capital, the $12bn Gulf investment fund, confirmed it was turning its focus from the West to local and emerging markets.

This shouldn’t surprise anyone, considering how badly burned Middle Eastern financers have been by pouring money into the likes of Merrill Lynch, UBS, and Citigroup. Perhaps the £6bn investment by the Qatar and Abu Dhabi ruling families last month, that prevented the virtual nationalisation of Barclays marked the end of this kind of assistance.

But to return from the world stage to matters domestic, Brown left Washington for London claiming that his prescription for global recovery – tax-cutting packages in every country to simultaneously aid economic recovery – had been almost universally accepted.

This set the stage for a dramatic 1.5% cut in base rate to 3% by the Monetary Policy Committee on November 7 and for chancellor Alistair Darling to reveal a £1trillion recovery plan in his pre-Budget report on November 24, though the scale of his vision was rather undermined by his curious decision to cut VAT by 2.5% for a year when many retailers were already discounting by as much as 20%.

The rate cut was the biggest since 1981 and was a signal that the MPC’s fear was no longer inflation but a prolonged recession and the threat of deflation.

It was good news for borrowers with tracker mortgages but the fall in rates must have been sickening for home buyers who had followed the chancellor’s advice back in the April. Back then, he advised buyers to do the sensible thing and go for fixed deals. Does the Financial Services Authority have a view on treating the electorate fairly, we wonder?

The rate cut wasn’t good news for savers, who outnumber mortgage borrowers by about seven to one, but right now the government wants us to spend rather than save while expecting mortgage lenders to use retail funding to meet mortgage demand.

The anomalies in the government’s position, both on interest rates and mortgage funding, are explored in more depth in David’s Smith’s analysis (see pages 26-29) and by Michael Coogan in his column on page 17.

Coogan’s comments are particularly pertinent as they are informed by the chancellor’s pre-Budget report. But both Smith and Coogan give substance to the view that lenders have become scapegoats for the Labour government which must know perfectly well that they cannot pass on the full value of the base rate cut and restore lending to 2007 levels because there is a funding gap of at least £740bn, and because the FSA is imposing balance sheet restrictions on liquidity and forcing even retail-funded lenders onto wholesale money markets where the cost of money is higher.

That didn’t stop the government from posturing like a thug and threatening to nationalise the banks they have accused of not delivering a payback, following the Treasury taking stakes worth £37bn in HBOS, Lloyds TSB and the Royal Bank of Scotland.

According to the Telegraph on November 22, the rescued banks had promised to return lending to last year’s levels but were not delivering. It quoted John McFall, chairman of the Treasury select committee, saying: “If the banks do not play ball and will not resume lending, demand for full-scale nationalisation may grow.”

The broadsheet added: “No 10 refused to rule out such a step, regarded by officials as the nuclear option. Brown’s spokes-man said: ‘In these circumstances, we have to look at all the options. But we want to work constructively with banks to ensure they fulfill the commitments they have entered into.’

“Asked a second time about full nationalisation, he replied: ‘It would clearly be foolish for anybody to rule out specific options at this stage. The government has made little effort to disguise its frustration at the behaviour of banks towards small businesses and mortgage-payers.'”

That pressure has continued. On November 26 Darling pledged to hold banks to account as he admitted the government needed to do more to get lending flowing again.

Facing down MPs’ questions at an emergency House of Commons debate on the pre-Budget report, Darling said: “We need to go to further than the pre-Budget report. The government will hold banks to account. Just as in the good times the banks were falling over themselves to get customers through their doors, it falls to them in the bad times to treat their customers fairly.”

George Osborne, shadow chancellor, saw some irony in this and pointed out that the government-owned Northern Rock had that very afternoon increased the rate on its one-year fixed rate from 3.99% to 4.19%.

All this politicking was a reflection on what was happening (or not) in the mortgage and housing markets.

Data from the Council of Mortgage Lenders shows that gross mortgage lending totalled £18.7 bn in October – almost 7% higher than the £17.5 bn lent in September. But that was the lowest gross lending figure since January 2005. Moreover, the October figure was 44% down on the £33.4bn seen in October 2007.

These figures make grim reading, especially after the base rate cuts in October and November. Nor does the outlook appear much brighter. The CML estimates that gross lending for 2008 will end up at around £255bn compared with £363bn in 2007. The trade body also forecasts that net lending for 2008 will be around £40bn compared with £108bn the previous year.

The lack of mortgage funding and the grim economic outlook is also having an impact on house prices which, if one believes the headline figures, are falling more rapidly that in the early 1990s.

But at least Nationwide’s latest house price index offers a glimmer of hope. It reports a slowdown in the fall of house prices in November, with prices down 0.4% compared with 1.3% in October.

The average UK house price is now £158,442. This is a £25,000 lower than this time last year but about £25,000 higher than in November 2003.

Fionnuala Earley, chief economist at Nationwide, said: “In spite of the moderation in house price falls in November, with the economy in recession conditions do not appear favourable for a swift recovery in the housing market.

“With prices falling at their current rate there is little incentive for new borrowers to hurry into the market. But there are a number of measures which should provide some support to the market in general and help existing and potential home owners.”

Of course, she was referring to the dramatic cut in the base rate, which will improve the lot of an estimated one-third of borrowers on tracker mortgages, and the measures outlined in the pre-Budget report – but on those, the jury is still out.

Alistair Darling, in his own words

It was described as the chancellor’s £1trillion debt gamble to defeat the recession with jam today and perhaps grief tomorrow. We are referring to the measures announced in the chancellor’s pre-Budget report, and what he had to say about mortgages and the housing market serves as a summary of what’s in store:

Mr Speaker, I want to take steps to improve the supply of mortgages, avoid repossessions and increase the number of new homes. Today, I can set out proposals to do this.

The current problems in the housing market are a result of the credit crisis which has drastically reduced the opportunities for people to get a mortgage loan. Last month I took decisive action to recapitalise the banks so they can maintain the availability of lending, including mortgages.

Today, I welcome the publication of Sir James Crosby’s report on finance in mortgage markets. His principal recommendation is that the government support the mortgage market by providing, for a temporary period, guarantees for securities backed by new mortgages.

I share Sir James’ concerns about the availability of mortgage finance. To implement his recommendation, the government would need to obtain state aid approval from the European Commission and resolve some technical and practical considerations. But we will proceed to work up a detailed scheme based on his recommendations and seek state aid approval to proceed.

I will also take into consideration the interaction between this proposal and the credit guarantee scheme. I will report back by the time of the Budget.

I am setting up a new body – the Lending Panel – which will monitor lending to business and households. It will bring together the government, lenders, trade bodies, consumer groups, regulators and the Bank of England to monitor lending levels and practices by banks. And we will consider how else we can help ensure that those in work but facing financial difficulties can remain in their homes.

It is not just the availability of new mortgages which is a problem in the housing market, it is also fears about meeting the cost of existing home loans.

It is right that in these cases repossession should be the last resort. I am pleased to say that this has been recognised by lenders. The major lenders have agreed that, where someone is facing repayment difficulties with their home mortgage, they will wait at least three months after the borrower falls into arrears before initiating repossession proceedings. This will give home owners time to work with lenders to find a solution. I also welcome the commitment from lenders to explore all possible options, including accepting a minimum payment or mortgage rescue products, before and after home owners get into difficulties.

It is also important that families worried about their finances and mortgages can get expert and impartial advice. So I am announcing £15m of new funding for free debt advice, available to everyone.

I intend to take two further steps to help home owners.

First, in September I extended the Income Support for Mortgage Interest scheme which covers mortgage interest payments for those who have lost their jobs. Today I can announce we will also increase the upper limit of the scheme, for mortgages up to £200,000, from the present limit of £100,000. This will help ease worries for home owners who have lost their jobs as they look for new employment. I have also agreed that, for six months, the level of interest rates covered by the scheme will remain at just over 6%.

Second, I can announce new mortgage support for people in work. In September we set up a mortgage rescue scheme, helping vulnerable home owners facing difficulties stay in their homes. Today I am extending this scheme so it will also cover those at greater risk as a result of taking out second mortgages. Together, this provides help against repossession worth £200m.

Mr Speaker, first-time buyer demand and long-term housing supply are the cornerstones of the housing market. In September, to boost the market as a whole, I agreed that £700m of government spending for new social rented homes and shared equity schemes should be brought forward. Today, as part of the acceleration of capital spending, we will bring forward an additional £775m to invest in thousands of new and modernised social homes as well as regeneration projects.

Overall, this is a package of support for housing worth a total of £1.8bn – support which can only be provided because I have decided we must act to give real help to people. It will help the home owners of today stay in their homes and help the home owners of tomorrow buy their first homes.


FSA bends rules for merged mutuals

The Financial Services Authority is to allow merged societies to be covered by deposit protection compensation as separate entities.This follows recent concern that members with savings in two merging mutuals would not be protected if the savings in both accounts exceed the £50,000 maximum deposit protection limit for the Financial Services Compensation Scheme.Jon Pain, retail […]

Chewing over the future

About this time last year Lending Strategy invited a group of senior lending executives to a lunch with David Smith, economics editor of the Sunday Times.


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