ALISTAIR Darling is set to back a £100bn gamble with taxpayers’ cash in a desperate bid to kick-start the struggling mortgage market. The Chancellor’s plan involves effectively underwriting the majority of new mortgages in the UK to encourage big investors to give badly needed money to lending banks.
The proposed scheme means the UK Government would guarantee mortgage bonds, where banks parcel up individual home loans and sell them to investment firms. When the system works properly, banks have a source of money to loan to customers and investors get a return.
– Darling closes in on plan to kick-start bank lending (Times)
– Downturn escalates on both sides of the Atlantic (Telegraph)
But with many investors currently reluctant to risk their money on mortgages, Darling is preparing to guarantee the value of mortgage bonds to get the cash flowing again.
The total value of new mortgages involved has been estimated as up to £100bn, leading to claims last night that the scheme poses too many risks to taxpayers while offering too few rewards. And the new measures, coming on top of a £500bn scheme to guarantee banks’ borrowing and the £12bn cut in VAT announced in October, will raise further fears over the extent of the Government’s spending in the face of the credit crunch.
The latest moves follow growing evidence that housebuyers are experiencing chronic difficulties getting mortgages. Figures from the Royal Institute of Chartered Surveyors (RICS) show new buyer inquiries are at their highest level since October 2006, but new mortgage approvals by banks are at a record low. From a high of 130,000 a month in mid-2006, approvals have fallen to fewer than 30,000 a month.
Last night officials confirmed the mortgage bond guarantee plan was now “on the table”. A source close to the discussions said: “Two years ago, banks had a huge pool of finance which has now dried up.
“The more high-risk mortgages will probably not be included, but the idea is to package up the new mortgages. The Government would then offer some sort of guarantee should the market continue to go down.”
Prime Minister Gordon Brown dropped a major hint last week he would support the move, saying he wanted to “secure the funding necessary for home ownership”. Darling is already warning a potential recovery in the housing market may be stymied because home-buyers can’t get funds.
Brown and Darling are close to agreeing a fresh package of measures to boost lending, to be unveiled within weeks. Ministers are also considering plans to guarantee individual loans to businesses. A national ‘bad bank’ – to hold the toxic assets currently on banks’ balance sheets – is also under discussion.
But opposition parties warned that the scheme was risky. Liberal Democrat Dem shadow chancellor Vince Cable said: “I am very sceptical about it. There is a danger of repeating the same mistakes in the mortgage market that caused so much damage last time.”
“There is a role for guarantees in the system, but by giving guarantees to any form of commercial lending you risk the taxpayer taking on all the risk and not getting any of the benefits. We know that the Governor of the Bank of England is very unhappy with this plan in the light of the experience of Northern Rock and I share some of his concerns.”
A RICS spokesman said last night: “With many first-time buyers unable to find the finance to take an initial step on to the housing ladder and existing owner-occupiers needing to move similarly blighted, the time has come for the Government to take direct action to restore an orderly property market.
“Government guarantees should inject some much-needed confidence into the securities market. In the absence of such action, the danger is that potential homebuyers will continue to be frozen out of the market, pushing transaction activity and prices to new lows.”
Michael Luck, managing director of Slater, Hogg & Howison, said: “It is a good idea. Anything the Government does to put guarantees in place is good, but the days of 100% plus mortgages are now gone and that means there will be people who just don’t qualify for a loan.”
Published Date: 11 January 2009
By Eddie Barnes Political Editor