Bank of England’s £50bn liquidity initiative leaves building societies and specialist lenders out in the cold

The Bank of England has launched its scheme to allow banks to swap temporarily their mortgage-backed and other securities for UK Treasury Bills, though the size of the package, estimated to stand at £50bn has not been confirmed, and it is not clear how the package will help the bulk of the UK building societies and specialist lenders have been left out in the cold.

The announcement, on 21 April, followed a Downing Street meeting between Gordon Brown and the chiefs of Britain’s biggest lenders on Tuesday 15 April, to discuss the growing problems in the housing and mortgage markets and how they might be resolved.

The meeting was confidential but according to a report in The Sunday Times, it was Antonio Horta-Osario, chief executive of Abbey, who championed the cause of the building society sector and “gave Brown some start choices”.
Apparently he told the PM that if he wanted to see the big banks end with 100% of the UK mortgage market, then he should do nothing but if he wanted choice in the market – and the building societies to survive – then the government would have to take action.

In another version of the event, it was Graham Beale, chief executive of Nationwide Building Society, who took up the cause of the smaller societies with Horta-Osario coming in forcefully.

He emphasised that any attempts to pump liquidity into the markets would have to use a mechanism that worked for even the smallest society and later told Lending Strategy that Nationwide would be mindful of its responsibilities to the sector.

The problem is that only three of the UK’S 59 building societies securitise and therefore would be unable to post their mortgage books as collateral against emergency cash.

Curiously, the Building Societies Association does not see this as an issue. Speaking to Lending Strategy on Monday 21 April, a BSA spokesperson inverted the logic of the position and said that the new Bank of England initiative was irrelevant to the majority of its members because they didn’t securitise and pointing to record inflows of retail funds, suggested that there wasn’t a funding problem anyhow.

This is add odds with the statistics available and anecdotal evidence that is coming from building societies which are being forced by the Financial Service Authority to hold record levels of liquidity and are having to batten down their hatches.

Moreover, as will be pointed out by Gary Styles of Hometrack in the next issue of Lending Strategy, Bank of England data shows that mortgage approvals for new mortgage lending by building societies has fallen year-on-year by 42% (February 2007/February 2008) while approvals by banks fell by 27% over the same period. Worst hit have been the off balance sheet lenders who are down 59%.

With remortgaging building societies have faired better in that their volumes, at 17,000 loans in February, remains unchanged year-on year, while banks have seen a 15% improvement and the off balance sheet lenders have experienced a 48% fall in volumes.

The remortgaging story is slightly different. While banks have actually seen a 15% rise in remortgage volumes since last year building societies have seen broad stability but in the wholesale funded sector loan volumes have fallen by 48%.