Assetz® News - Banking on a bond

Banking on a bond

21st April 2008 |

The last few months have been tough for those seeking to get a mortgage, be it a residential loan for that all important first home or a buy-to-let mortgage. In both cases the supply of products has fallen, while the reverse has been true about the size of deposits. Lending criteria has tightened too.

Some might suggest there is a deafening sound of stable doors being closed too late, with lenders only now realising the harm done by being excessively loose in their lending. Whether that is a justified view or not, a return to such lending policies seems unlikely, according to the experts. Speaking in London last week, Bank of England monetary policy committee member Charles Bean said stricter lending criteria will still apply after the credit crunch has faded. He added that there will also be higher deposits than existed in the recent boom years.

Yet in the meantime, the government and the Bank of England has been keen to get the mortgage market back up and running, in order to bolster the property market. With the latest unemployment figures showing the lowest claimant count since 1975 and the base rate having just been cut again, other factors appear to be in place to either underpin the market or improve it outright. This has left dealing with the liquidity problem that has manifested itself in high interbank (Libor) lending rates and a consequent lack of liquidity a priority.

The solution, talked about for weeks but announced today, has been a £50 billion plan under which banks will be able to trade mortgage debts for securitised bonds, with the Bank of England thus offering a source of funding the money markets have been increasingly unwilling to provide. In theory this will ensure more liquidity, bring down interbank lending rates and loosening the purse strings enough for more favourable mortgage rates to be offered to borrowers. With getting a mortgage made easier, the theory goes, the property market will be kick-started.

However, the response to this has been mixed. The Council of Mortgage Lenders has expressed some scepticism, with director general Michael Coogan noting: "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."

Despite this cautious response and the observation that some smaller and specialist lenders will not be able to access the funds, Mr Coogan was nonetheless in favour of the move. A more wholeheartedly positive response came from the British Bankers' Association, stating: "The banks are participating in this arrangement and expect it to make a significant contribution to alleviating the pressures in the UK money markets."

The Intermediary Mortgage Lenders' Association (IMLA) also gave a very positive response. Like Mr Coogan, IMLA executive director Peter Williams noted the restrictions on which lenders could access the facility, but concluded: "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."

Ultimately, only time will tell if the measure works as intended and brings the mortgage market back to life, boosting investors and homebuyers alike. But the fact that such action has been taken will at least raise the hope that the recovery from the liquidity crisis will be quicker than many feared.