You are here

British Treasury planning huge rescue for mortgage lenders

Section: Daily Dispatches

Treasury Plan to Rescue Mortgage Lenders

By Edmund Conway
The Telegraph, London
Sunday, July 27, 2008

The Treasury is preparing a radical rescue plan for the housing market which may involve pumping billions of pounds into the stricken mortgage markets.

Alistair Darling, the Chancellor, has asked his leading advisers to investigate a plan to provide government support for lenders until the financial crisis has abated. The proposal is being investigated ahead of the completion of Sir James Crosby's report into the funding struggles faced by UK banks.

Crosby, the former HBOS chief executive, will present his interim report to the Treasury on Tuesday, and is expected to warn that banks are facing a massive "funding gap" caused by the collapse of the securitisation markets which previously provided around 40 per cent of backing for home loans. Experts think the gap to be filled by the Treasury could amount to L40 billion to L50 billion a year.

Sir James will warn that the mortgage famine, which is pushing prices up significantly for both buyers and homeowners who are renewing their deals, could persist for years, with painful consequences for the housing market. Although he will not provide cast-iron recommendations until his final report in October, he is expected to warn the Government that some form of intervention is necessary to lessen the eventual economic pain.

In advance of his recommendations, Treasury officials have been working hard to formulate a rescue plan based on his interim findings. Under this plan, the Government would offer to swap new mortgage debt with banks for gilt-edged government securities. The scheme is very similar to the Bank of England's Special Liquidity Scheme in which the Bank swaps treasury bills for old mortgage debt, except in this case the scheme would cover new mortgages issued this year. It remains unclear as to what role the Bank would play in the new scheme, although Governor Mervyn King is thought to be reluctant to have a direct role in what many would regard as a bail-out for the UK mortgage market.

In reality, the scheme would be designed to support the wider housing market and economy. According to Peter Spencer, economic adviser to the Ernst & Young Item Club, the faster the Government acts, the less it will ultimately have to spend supporting the economy.

"I would be opening my chequebook to the banks and building societies to try to stop the [housing market] slide," he said. "If there are people out there prepared to borrow money from the Government through banks and building societies then that's what we need at the moment. The sooner the Government spends the money the less it will have to spend eventually. Once these markets collapse and confidence disappears, there are all sorts of consequences in terms of job losses, which will be even more costly for the wider economy."

In 2006 total net mortgage lending amounted to just over L100 billion, with around L60 billion of that funded by banks' deposits and the remaining L40 billion by securitisation. The demise of the securitisation markets, in which banks package and sell on the mortgages to investors, left lenders with a L40 billion hole if they intend to lend as much as previously. They are also having to pay back investors of the existing mortgage backed securities around L20 billion a year, so the hole is as large as L60 billion.

Experts warned that although the nationalisation of Northern Rock and subsequently the special liquidity scheme helped support the market temporarily, this effect is now wearing off.

Many analysts have warned that the number of new mortgages being issued could drop to almost zero by the end of the year. The British Bankers' Association reported this week that the number of mortgages approved for home purchase dropped by more than two thirds in the year to June, hitting just over 21,000 last month. Although the Government is highly wary of being seen as risking taxpayers' money on a rescue operation of the mortgage market, there are precedents for providing such support. The Labour Government of 1974 did so with a L500 million loan, and the current crisis is regarded as far more pressing. It will also ensure that the loans are accepted only with a major "haircut" and on such terms that they will only be at risk if house prices plunge by unprecedented and entirely unanticipated rates.

It can also point to actions being taken by the US administration to shore up its own housing market. As well as taking radical action to support Fannie Mae and Freddie Mac, which support its domestic mortgage market, Congress yesterday passed a major package of housing legislation including tax relief for homeowners, a new regulator for Fannie Mae and Freddie Mac, and a $300 billion anti-foreclosure programme.

Another plan being considered by the Treasury is to multiply the amount of cash it is providing to local authorities to buy up homes from developers.

* * *

Join GATA here:

Hard Assets Investment Conference
Tuesday-Wednesday, September 9-10, 2008
Mandalay Bay Resort and Casino, Las Vegas, Nevada

* * *

Help Keep GATA Going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at

GATA is grateful for financial contributions, which are federally tax-deductible in the United States.