The month at a glance

Monday September 1 should have been designated National Anticipation Day, with the country\'s attention focused on what Prime Minister Gordon Brown and his government might announce on the morrow to save beleaguered home owners - and the PM\'s political bacon.

But it wasn’t to be. Chancellor Alistair Darling had let slip over the weekend that we were possibly heading into the worst economic conditions for 60 years – an assertion that raised big question marks about his political savvy and financial acumen, and sent sterling and the PM’s chances of a political comeback heading south.

Thus on Tuesday morning, when communities secretary Hazel Blears was all spruced up in her best M&S outfit to announce a package of measures to help the housing market (see page 16 for details), the media were still questioning the chancellor’s political future.

To add to Brown’s woes, his comeback was also marred by news from the Organisation for Economic Co-operation and Development (OECD) that while the economies of Japan, Italy, France and Germany would recover sufficiently to record some growth this year, the UK economy would slump further after 16 years of consecutive growth.

Actually, the OECD’s scenario was arguably more optimistic than the chancellor’s apocalyptic vision of the future. The OECD expected GDP to shrink by 0.3% between July and the end of September and by 0.4% in Q4 2008, and cut its annual growth forecast from 1.8% to 1.2%. However, this still amounted to a warning of a recession and offered a further signal that the government was in deep trouble.

So when the Treasury announced that it really was going to implement a stamp duty holiday – but only for homes under £175,000 – to help aspiring home owners get on the housing ladder and stop those on it falling off, the mood of the people wasn’t too receptive.

Aside from the government’s credibility headache, the problems of the housing market have nothing to do with the public’s appetite for home ownership and will not be addressed by state intervention to prop up house prices, but by a return to some sort of sustainable mortgage market.

To that end, there were some indications on Tuesday 2 that the publication of the Crosby Review would be brought forward to the end of the month rather than waiting for the pre-Budget report.

The view that the government should do something sooner rather than later certainly got a boost on Monday September 8 when US Treasury secretary Henry Paulson confirmed the virtual nationalisation of Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), the government-sponsored enterprises that underpin the US housing market, with £2.94trillion of mortgage debt between them.

But judging from his performance at a Treasury Select Committee hearing later that week, it seemed unlikely that Bank of England governor Mervyn King would be moved far in that direction, whatever was happening in the US. Darling may have wanted an extension of the Special Liquidity Scheme but King insisted that the SLS, introduced in April, would close on October 21.

As a sop to its disappearance, King told the committee that the BoE would introduce a liquidity insurance scheme and had published a a consultation paper to that effect.

But on September 16, following an avalanche of events precipitated by the fall of Lehman Brothers in the US, the BoE announced an extension of the SLS until January 30 2009.

Returning to King’s appearance before the Treasury committee, he acknowledged that the insurance scheme wouldn’t solve the mortgage funding problem but he did not seem to see this as his head-ache. And he was scathing of the idea that the BoE should follow the US Treasury’s example of buying mortgage securities.

He apparently sees the mortgage funding crisis as a symptom of a deeper malaise in the banking system – namely, that it is undercapitalised – and for those hoping for a fix for the mortgage securities market, he offered none.

In his view, raising mortgage funding in this way is relatively new and lenders should simply return to raising funds through retail deposits.

Nationwide makes its move

It was an interesting perspective in light of the fact that news of the £110bn bailout of Freddie Mac and Fannie Mae coincided with the announcement that The Derbyshire and The Cheshire building societies – two traditional deposit-takers – were to merge with Nationwide as part of a rescue package.

The Cheshire, at number 11 in the building societies league with assets of £4.9bn, had been limping along with poor results even in the good years that preceded the credit crunch. In 2006 the society recorded post-tax group profits of £10.6m but by the end of 2007 that had slumped to £5.1m. And worse is to come. It expects to incur an unaudited pre-tax loss of £10.5m for the half year to June 30 2008 due to an exceptional £11.5m im-pairment charge on a single se-cured commercial loan.

The Derbyshire, the ninth largest society with assets of £7.9bn, initially saw its profits grow significantly under a diversification programme, only to slump dramatically as a group from £16.4m in 2006 to just under £8.7m last year when it took a £4.5m charge to increase its provisions for bad debt.

The Derbyshire pulled out of sub-prime lending earlier this year and there are concerns over the quality of the mortgage books it acquired to build its balance sheet. Indeed, it expects to report a pre-tax loss of £17m for the half year to June 30, arising predominantly in its near-prime, sub-prime and commercial loan port- folios. It’s said that the proportion of the society’s sub-prime borrowers more than three months in arrears was running at 9%.

But such losses are chicken feed compared with the problems being experienced in the US where, despite or because of early government intervention, events were gathering momentum. On the weekend of September 13-14, Lehmans went into liquidation after reporting billion dollar losses, and Merrill Lynch was acquired in a rescue deal by Bank of America for $50bn .

Meanwhile, the problems facing international insurance giant American International Group were lurking in the wings and no doubt spooked the market when the London Stock Exchange op-ened on Monday September 15.

Early trading saw HBOS’ share price fall 32% to just 180p. The Royal Bank of Scotland was also badly hit, falling 18% to 202p, while Barclays and Bradford & Bingley fell 16% and 14% respectively. No firm remained unaffected,with Lloyds TSB dropping by 7% and HSBC falling 4%.

A superbank is born

The onslaught on HBOS shares in particular was to continue. As stated earlier, on September 16 Mervyn King had done a U-turn and extended the SLS until January 2009, and 10 of the world’s largest banks launched a $70bn liquidity package in response to the deteriorating situation, but this wasn’t enough to take the pressure off the UK mortgage bank.

Indeed, there is a view that instead of easing nerves, the US government’s $85bn rescue of AIG late on Tuesday triggered panic among investors on both sides of the Atlantic which saw the run on HBOS shares intensify. But acc-ording to press reports, the Prime Minister had already seen the writing on the wall on Monday night when he facilitated a deal with Sir Victor Blank, chairman of Lloyds TSB, who he had met at a City reception.

The fact that advanced merger talks were taking place between HBOS and Lloyds TSB was confirmed on Wednesday September 17 and while in theory these could go either way, the reality was that the days of HBOS as an independent entity were over. The government had already sorted out any Competition Commission issues and having gone so far, there was no where else that HBOS could go. The deal to create the UK’s largest retail bank was confirmed on Thursday September 18.

The new bank will enjoy a dominant position on the high street and in the housing market, with 34% of all outstanding mortgages.

The £12.2bn takeover brings together the UK’s biggest mortgage lender and savings bank with £258bn of retail deposits, 15 million savers and a 20% market share of new home loans with Lloyds TSB which, through its Cheltenham & Gloucester subsidiary, accounted for around 8% of new mortgage business in 2007.

Curiously, calm returned to the market around about this time. It had be assuaged by an injection of £100bn into world markets by the central banks of the US, the BoE, the European Central Bank, the Bank of Japan, the Bank of Cana-da and Swiss National Bank.

The mood swing was also to be helped by news from the US that Paulson had a master plan to resolve the global banking crisis once and for all with a $700bn (£378bn) bank rescue package.

This would enable the US Treasury to buy mortgage-related securities from “any financial in- stitution having its headquarters in the US” with securities issued before September 17 being eligible for inclusion, so soaking up all contagion.

US President George Bush said the initiative was necessary to prevent financial contagion damaging the wider economy but by Tuesday September 23 it was being reported that the dollar had taken a beating over the Paulson bailout, which was being seriously questioned by Republicans and Democrats alike.

As so often in the month, what was Friday’s good news turned into the following week’s nightmare, with senior Republican Richard Shelby describing Paulson’s proposals as “neither workable nor comprehensive”.

Part of the problem was that Paulson had not been specific on how he would spend the money. The deal lacked transparency and accountability, and the ‘trust me’ approach without much detail and so much taxpayers’ money at stake sparked a negative reaction.

Fears that the size of the financial exposure implicit in the plan would have a knock-on effect on the dollar also sent oil prices soaring on Monday September 22 but they dipped again the following afternoon.

Although a decision on the required legislation won’t be made until Friday September 26, after Lending Strategy has gone to press, the general expectation is that Paulson will get his way simply because the consequences of doing nothing could be catastrophic and nobody has come up with a better plan.

Meanwhile back in the UK, the state we are in was exemplified by speculative stories about the future of Bradford & Bingley. These were no doubt fuelled by the thought that if HBOS could fall anyone could be in the firing line, and B&B is looking vulnerable.

On September 22 for example, The Times reported that the Financial Services Authority had failed to find a white knight for the buy-to-let specialist, having approached National Australia Bank, ING, and Bank Santander. Then, to add to B&B’s woes, on the following day Fitch Ratings downgraded its assessment of its books in response to the reports that a white knight was being sought for B&B.

Fitch stated: ” Although these reports have neither been confirmed nor denied, there is a serious risk that they could have a further destabilising effect on B&B. Disruption to the wholesale funding markets on which B&B relies heavily for funding its customer loans has weakened its operational flexibility.

“It also highlights the importance of the bank’s retail deposit base. Fitch is concerned that further deterioration in market confidence could result in increased pressure on this source of funding, something that Fitch believes would be unpalatable to the UK authorities, thereby triggering regulatory intervention”

Other indicators of the gloomy state we’re in included the British Bankers’ Association’s mortgage lending figures for August, which showed that net lending rose only by £2.1 bn – less than half the average rise in the previous six months. The number of approvals for house purchase was again low and remortges also fell.

The gross lending figures from the Council of Mortgage Lenders tell a similar story. These totalled some £21.8 bn in August – a 12% fall from July and a 36% fall from August 2007. This is the lowest monthly figure since April 2005 and the lowest August figure since 2002.

But to end on a positive note, although the UK mortgage and housing markets seem on the rocks a poll of 1,500 first-time buyers conducted by The Co-operative Bank and Places for People shows that more than half (54%) think of renting as “throwing money down the drain.”

Cynics may question how the Co-op managed to rustle up 1,500 first-time buyers, especially when data from the CML’s recent regulated mortgage survey is taken into account. This shows that first-time buyers are, on average, paying deposits of more than £19,000 – equivalent to 15% of a property’s value. Not surprisingly, the Co-op’s survey also shows that most people now take up to two years before they begin to think about buying their first home.

But once they have made the decision, they seem determined to knuckle down, and are even prepared to make sacrifices. The survey asked what they are prepared to give up to become home owners. Top of the list was eating out (53%), then holidays abroad and weekends away (50%), new clothes (40%), coffee and lunch from shops (39%), alcohol (39%), smoking (27%), delaying having a family (22%) and getting married (20%).

No doubt the chancellor will welcome to this return to old-fashioned values embraced in re-sponse to good old-fashioned banking, but surely it’s not that hard to find a better way