Lending won’t grow until lenders repay debt to Bank

Recently I have been writing a lot about mortgage funding and how the lack of funding has caused material problems in the mortgage market. 

The forecast for this year’s gross lending numbers are broadly the same as last year at £150bn and this is despite the economy looking somewhat better than it did a year ago. 

One of the reasons that this is the case is that a number of large lenders have borrowed money from the Bank of England via the Special Liquidity Scheme and the money is due to be paid back by January 2012. 

32 banks and building societies used the scheme and this is probably causing major concerns about where they are going to find the money to repay these loans and this in effect is dampening their appetite to lend right now.  

The numbers involved are substantial – approximately £300bn has been borrowed via the SLS which is nearly the size of all the mortgage lending done in 2007. 

Liquidity isn’t much better now than it was two years ago and finding nearly £300bn looks like an almost impossible task. 

My guess is that at some point in the not too distant future the Bank of England will announce that it is extending the date at which the SLS needs to be repaid in order to allay the concerns about liquidity and to encourage more lending. 

Maybe it would be a worthwhile cause for Mortgage Strategy to campaign for this to happen but in any event until this large obstacle is removed we are unlikely to see much movement in the gross lending figures.