After we welcoming the announcement of a special liquidity scheme, said to be worth around £50bn, and saying that he hoped it would have the desired effects of improving the liquidity position of the banking system and restoring confidence in financial markets, he said: “What the scheme does not do is give all mortgage lenders direct access to the new funds. In particular, it does not include smaller building societies and specialist lenders.
“Further details are also awaited on how much of the additional liquidity might be recycled responsibly into mortgage products or pricing, so that lenders can bridge the gap between how much consumers want to borrow and how much funding is available this year.
“The recent trend of mortgage products being removed and mortgage prices increasing for new customers will be affected more by how Libor responds to the announcement. The improved liquidity is unlikely to reverse the trend to higher mortgage costs we have seen in recent weeks.”
Peter Williams, executive director of the Intermediary Mortgage Lenders Associations would have liked the action to have been taken more quickly, given the damage that has been inflicted on the market.
“However, this move is welcome and should start to ease the logjam in mortgage funding”, he said.
“It is important that specialist lenders, along with banks and building societies, with AAA rated mortgage backed assets, will be able to swap them against government securities. That does mean that the facility will be relatively restrictive and that lenders with non-prime packaged assets will not be able to tap this source of funding. It also can’t be used to support new business, although the general easing of liquidity in the market should have a knock-on effect on the availability of new funds to hard-pressed mortgage customers.”
“The beauty of the arrangement is that it is absolutely not a bail out and lenders will remain responsible for any losses – so avoiding the ‘moral hazard’ that discouraged Mr King from supporting Northern Rock back in September. Banks will still have to pay for bad credit decisions. Despite its limitations, we must regard this as a positive step in terms of kick-starting the mortgage industry, and it should reduce negative pressures in the housing market and in the wider economy.”
Graham Beale, chief executive of Nationwide Building Society, said: “We welcome the government’s announcement – this is good news for the banking system and for borrowers. It should have a beneficial impact on the marketplace, easing market conditions.
“It is a practical first step with the potential to lead to a natural recovery in the financial market place that is sustainable in the long term. However, the mortgage market will not transform overnight.”
However, he thought that there was a need for the regulators to look again at the liquidity ratios of smaller societies and to be more flexible. “If societies are made to keep their ratios artificially high, then there will be less money available to support mortgage lending,” he said.