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Trust crunch is the biggest threat of all

First there was the global credit crunch, then the liquidity crisis and now we’re facing a new threat – the trust crunch.

A Radio 4 pundit said recently that all banks are bust. This is a controversial claim but he qualified it by saying that lenders only make money when they can lend more than they hold in capital, so they gear their capital investment by borrowing from other lenders.

The problem is that the banks don’t trust each other enough to lend to one another thanks to bad debt.

Recently, Swiss investment bank UBS unveiled a further $18bn of bond market write-downs on top of the $18bn it disclosed last year.

But if it can’t borrow enough to cover its existing liabilities, it will go bust. Just look at Northern Rock, which lent long and borrowed short and had to be saved by the government.

If lenders have inflows such as retail deposits from savings customers or borrowers repaying their loans, they’re holding onto the cash to repay some of their own debt if they can’t roll it over.

As LIBOR lending dries up, the knock-on effect is passed onto the mortgage market. Lenders manage their balance sheets by not doing much lending and restricting the amount of new mortgage business by increasing prices and tightening criteria. If they reach the limits of acceptable gearing according to their internal rules or regulation, they stop lending. We’ve already seen this happen on a number of occasions and more lenders are bound to follow suit.

I was in a meeting with a group of lenders recently discussing the size of the gross mortgage market this year.

There’s nothing unusual in this as market forecasting has always been a topic of conversation but one of the responses to the question of whether the market will be worth over or under £300bn in 2008 surprised me. One of the lenders said that the demand needed to hit the figure would exist but nobody could be sure about the supply.

The scary implication is that by the end of the year the size of the mortgage market will be determined by the amount of funding lenders can cobble together.

Consumer demand is still high for mortgages but unless trust returns to the money markets and lenders and investors start to lend to each other again, it will be difficult to satisfy it.

Sadly, restoring trust will be difficult. Even if central banks pump billions into the financial system, lenders might simply hang on to it. For the time being, the trust crunch is what we should worry about.


Kensington shares funding

Brokers are calling for len-ders to copy Kensington Mortgages’ move to share mort- gage funding equally between brokers and packagers.The lender is providing funding for products in set tranches to be shared by the two groups. It says this will be done in a fair and transparent way that will limit lending volumes in line […]

Complete offers debt management service

Mortgage packager and distributor, Complete Mortgage and Loan Services has joined forces with Nationwide Financial Management Limited to offer brokers the Complete Debt Solution.Tristan Pile, head of sales and marketing at Complete, says: “In today’s marketplace it increasingly difficult to source mortgages for sub prime debt consolidation purposes, as lenders continue to tighten criteria to […] teams up with KRS has linked up with Key Retirement Solutions to help pensioners looking to take out equity release plans.Enquiries for lifetime or home reversion deals fielded by Mortgages. will be forwarded to KRS, which will contact applicants to offer advice.The consumer finance website has generated a large number of enquiries from consumers looking to explore […]

Fears for market as last 100% LTV deal is pulled

Brokers are warning the mortgage market will suffer following Abbey’s withdrawal of the last 100% LTV deal last week.Jonathan Cornell, managing director of Hamptons Mortgages, says the disappearance of such deals will leave first-time buyers bereft of options and unable to get onto the housing ladder.He says the knock-on effect will be felt across the […]


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