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A 50% drop in mortgage lending in the past 12 months and dire predictions by the government's mortgage tsar of a complete freeze in home loans next year prompted calls yesterday for immediate action from the chancellor Alistair Darling to assist home owners.
Data published yesterday showed home loan approvals halved in the year to the end of October. This came a day after Sir James Crosby warned that net lending would fall below zero next year in his report published alongside the chancellor's pre-budget report on Monday.
Data from the British Bankers Association showed lending had fallen in October to its second lowest level since records began in April 1997. The record low was in August when only 21,363 new loans were approved. The figure rebounded slightly in September but dropped to 21,584 in October. Mortgage lending is down by two thirds from its July 2007 peak - the month before the credit crunch started.
Net lending - which strips out loans repaid from new ones granted - was £2.9bn in October, the second lowest figure since April 2001.
Crosby, the former chief executive of HBOS, predicts net lending will fall below zero next year - indicating that more loans will be paid off than new ones granted. He used the drought in mortgage lending to support his recommendation that the government uses £100bn of taxpayers' money to guarantee the moribund market for mortgage-backed securities.
These bonds package up mortgages that are sold on to investors. They provided £200bn of finance for banks last year, before the credit crunch paralysed this wholesale market for funding.
Darling has promised to work on a detailed scheme to adopt the Crosby guarantees that could be sent to the EU for state aid approval in time for next year's March budget. Treasury sources indicated Darling was trying to present a package to the EU before Christmas and lenders urged Darling to move quickly.
Buy-to-let lender Paragon's chief executive Nigel Terrington described Crosby's recommendation as "the single most important measure" unveiled by Darling.
A spokeswoman from the Council of Mortgage Lenders described Crosby's predictions as "entirely plausible". The CML will publish its own predictions for the 2009 mortgage market next week. It had previously warned that it expected the mortgage market to halve this year.
The CML, which lobbied Crosby to take action on the mortgage market, said: "The sign of relief at the CML is that the government is going to accept Crosby." But she urged the government to act before next March's budget as the report illustrated the severity of the funding squeeze.
Without a revitalisation of the wholesale market, Crosby warned that mortgages could be scarce next year. Crosby raised the problems faced by lenders in refinancing their existing funding in the wholesale market, where he estimates £160bn of mortgage-backed bonds have to be refinanced over the next three years. This suggests lenders will struggle to maintain past levels of lending before even beginning to offer new loans.
Crosby noted that the lack of mortgage finance has implications that go beyond homeowners. It is having an "immediate and severe impact on house builders".
But he said the "real risk" is that the market "overshoots on the downside" as house prices fall too fast. "Such a downward spiral would have serious consequences across all segments of the housing market and across all industries dependent on housing activity," he said.
He believes the impact will also be felt by the more vulnerable members of society. "The effect would be felt most acutely in the overall number of housing starts and more specifically in lower-priced housing in the least expensive localities," said Crosby.
His recommendation for a guarantee of mortgage-backed bonds yesterday prompted the Treasury to embark on a "quick review" of guarantees it is already offering for banks to issue bonds to try to kick-start lending between the banks.
This credit guarantee scheme was part of the £500bn bank bail-out announced in October and the government expects £100bn of bonds with its guarantee to have been issued by the end of the year. The review will be completed by Christmas.
- Housing market
- Economic policy
- Pre-budget report 2008
- Credit crunch
- Mortgages
- House prices
- UK banking sector
- Banks and building societies
- Property
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