BoE attempts to ease pressure
The Bank of England’s latest move aims to lessen the strain of the credit crunch on mortgage lenders in turn feed through to rates for borrowers. Barney McCarthy reports
Mortgage lenders and borrowers alike could be forgiven for feeling fraught as the property market, and the economy in general, lurches from one crisis to another. The Government has been criticised for not dealing with the problems of the credit crunch – such as the Northern Rock debacle – sooner, but this week (21 April) the Bank of England launched a scheme that it hopes will prevent any further damage to the UK banking system.
The £50bn-plus rescue plan allows banks to temporarily swap their mortgage-backed securities for UK Treasury Bills. The Bank hopes this will restore confidence and encourage banks to start lending to each other again. The Treasury will guarantee the scheme, but it is designed to avoid the taxpayer taking on the risk of potential losses.
At the moment, banks are unable to use their mortgage-backed securities in the wholesale markets to fund their own lending to consumers, which has caused the credit crunch situation we are currently experiencing. By swapping illiquid (relatively difficult to sell) assets for liquid (easily tradable) ones, the scheme intends to clear these blockages in the banking system.
Chain reaction
The scheme has generally received a warm reception from the mortgage industry, although several reservations remain. Steve Cox, operations director of Spicerhaart Financial Services, says: “The scheme does not include smaller building societies and specialist lenders, and we will need to see how the changes affect the current pricing of mortgage products, which is more influenced by LIBOR [London Interbank Offered Rate – the rate at which banks lend money to each other]. Equally, lending criteria, which has been tightening across the board, may well remain unchanged.”
The Intermediary Mortgage Lenders Association (IMLA), the trade body representing the interest of lenders who distribute their products primarily through brokers, says the scheme should be regarded as a positive step. Peter Williams, executive director of IMLA, says: “We would have liked action to have been taken more quickly, given the damage that has already been inflicted on the market. However, this move is welcome and should start to ease the logjam in mortgage funding. The beauty of the arrangement is that it is absolutely not a bail out and lenders will remain responsible for any losses, so they will still have to pay for bad credit decisions.”
Williams echoes Cox’s sentiments that the facility will not be accessible to specialist lenders, nor for new business, but says the general easing of liquidity in the market should have a knock-on effect on the availability of new funds to hard-pressed mortgage borrowers.
Brokers themselves, perhaps the part of the mortgage chain closest to the coalface – being as they are a conduit between lender and consumer – seem to regard the scheme as a good thing. Mike Fitzgerald, sales director at Essex-based brokerage Brentchase Financial Services, says; “Apart from the fact this money [the £50bn scheme] should have been offered in November, it is a welcome move. However, if it isn’t successful, then how much will be enough, another £50bn? £200bn? I hope it makes a difference quickly, but no-one knows how long it will take to filter through.” Fitzgerald says consumers aren’t just facing problems with mortgage affordability and availability, but with increasing energy, utility and everyday costs – symptoms of a wider economic malaise.
It remains to be seen how long it will take the scheme’s benefits to filter down to UK consumers, if it does at all, so most commentators are playing it safe in terms of expressing unadulterated praise for the Bank of England’s scheme. Initial reaction seems to suggest that it is a welcome tonic, but by no means a complete cure.
Tags: Bank of England, Credit crunch, liquidity
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