Squeeze on funds here to stay

Mortgage lending is set to remain depressed this year as house prices tread water and banks struggle to repay their loans. Meanwhile, a rate rise would do more harm than good

Tony Ward, Managing director, Home funding

Funding, or rather the lack of it, will continue to be a feature of the market in 2011.

Don’t expect a big rise in mortgage lending because in my view we will be lucky to have a re-run of 2010 in lending with about £135bn for the year. I think we are seeing a 10-year deleveraging of the markets and we are only three years into it.

We will, of course, see some more residential mortgage-backed securities and covered bond deals but I suspect they will mainly be originated or sponsored by the big banks rather than non-bank lenders.

House prices aren’t going to go anywhere fast in the near term either and I suspect the Bank of England would still like to see modest falls to remove any perceived remaining bubble effects. I suppose the trouble is that no-one knows where the bubble ends and the correct price begins.

The Special Liquidity Scheme stands today at £110bn, down from the peak of £185bn. Banks have been paying this off ahead of schedule but there is a lot left. The SLS goes by January 2012, as does the Credit Guarantee Scheme, now £120bn.

Banks are trying to increase retail deposit activity but this will not be enough to deal with refinancing and new funding in the future. I see no other source of funding for banks other than through RMBS and covered bond transactions.

Asset disposals will help the refinancing of particular banks such as Lloyds Banking Group, the Royal Bank of Scotland and Northern Rock but someone else will have to raise the finance to buy, so the net effect on