Darling promises action on mortgage lending
The chancellor Alistair Darling says the government is doing everything it can to increase the supply of mortgages following last month’s recapitalisation of the major banks.
Although mortgage lending was up by 7% in October, at £18.7billion that figure is still 44% down on October 2007. Since the credit crunch began lenders have found it almost impossible to raise finance for new products on the wholesale markets.
So, back in April this year the Treasury commissioned former HBOS chief James Crosby to advise the government on ways to improve access to mortgages and the functioning of the mortgage market. Crosby’s final recommendations were published alongside the pre-Budget report on 24 November.
Crosby confirmed that the effective closure of the securitisation markets would severely limit the availability of new mortgages not just in 2008 but also into 2009 and 2010. In order to free up these markets he has recommended that the government offers its support to the mortgage market by offering guarantees on "the interest and principal of high quality mortgage back bonds".
David Hollingworth, mortgage specialist at broker London & Country, says the initiative would give reassurance for investors and provide a line of funding directly aimed at those purchasing property. The guarantees would be aimed at residential and buy-to-let buyers rather than remortgagers and would not apply to sub-prime or high loan-to-value mortgages.
Hollingworth adds that if the government did adopt Crosby’s recommendations the mortgage market should hopefully pick up.
“At the moment lenders are focusing on strengthening their balance sheets – new lending is not a priority, so anything that will open up new funding opportunities has to be a good thing.”
However, while Darling agreed with the proposal in principal, the recommendation is unlikely to be adopted any time soon. In order to proceed the government would need to obtain State Aid approval from the European Commission to resolve a number of ‘technical issues’.
The Treasury also said that it remains unclear just how limited mortgage availability will be over the next year following recent government intervention. As part of the bank recapitalisation process, the government is expected to take substantial shareholdings in RBS, Lloyds TSB and HBOS and as a result will have to actively support the mortgage market and increase the availability of mortgage funding.
Darling announced he would report back in time for the budget, expected March 2009.
However Peter Williams, executive director of the Intermediary Lending Association, warns further government action may be required before the spring.
“Though we recognise the need to obtain approval from the European Commission for the guarantee scheme, it will take time to bring this proposal to fruition and we are concerned that more urgent action is needed to secure a flow of funds into the market now," he says. "It is our view that government may yet need to make a direct capital injection into the mortgage market.”
All sub-prime financial products are aimed at borrowers with patchy credit histories and the term typically refers to mortgage candidates, though any form of credit offered to people who have had problems with debt repayment is classed as sub-prime. Depending on the lender’s own criteria, sub-prime can apply to borrowers who have missed a few credit card or loan repayments to people who have major debt problems and county court judgments (CCJ) against their name. To reflect the extra risk in lending to people who have struggled in the past, rates on sub-prime deals are typically higher than for “prime” borrowers.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.