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Mortgage lenders are warning Gordon Brown that his scheme to prevent a surge in home repossessions could stifle new home loan lending despite yesterday's cut in interest rates from the Bank of England to an historic low of 1.5%.
The UK's biggest providers, already under pressure from the government over their reluctance to pass on the full benefits of reductions in the cost of borrowing, have told ministers the cost of providing a payment holiday for hard-pressed borrowers would limit their ability to grant fresh loans.
Lenders are concerned that their capital cushions - recently bolstered by fundraising including the £37bn taxpayer bailout - could be further eroded by customers who apply to have their payments deferred.
They may need to set aside more capital to cover customers who fall behind with their payments, further restricting the amount of money they can use to lend in the mortgage market. Eight banks and building societies, covering 70% of the mortgage market, have agreed to allow homeowners struggling with mortgage payments the right to defer all or part of their interest payments for two years. In return they will pay a fee to the government for underwriting the scheme.
The Financial Services Authority said it was discussing capital with the lenders, who are also seeking clarity on the status of the individual who applies to use the scheme. The Council of Mortgage Lenders, which is yet to respond to the consultation, said it was "absolutely committed to putting in place a scheme to reduce the number of repossessions". But a spokeswoman said: "There are a variety of issues being looked at by everyone responding to consultation including the capital treatment of this scheme and its impact on lender's regulatory capital requirements, its logistics and its workability."
Treasury sources said none of the eight lenders who had agreed to participate in the scheme had withdrawn their support while the Department of Communities and Local Government said: "We are continuing to work urgently with lenders on the detail of the scheme with a view to getting it up and running as soon as possible. All the major lenders are working with us on the development of the scheme and we are continuing to meet with them regularly to resolve any outstanding issues. "
The supply of mortgages is already a concern for the government, which was dealt a further blow yesterday when Bank of Ireland said it was scaling back its UK mortgage operation and axing its 158-year-old Bristol & West brand.
With the Japanese car company Nissan adding to the rising unemployment total by announcing 1,200 job losses in the north-east, the prime minister and the chancellor promised new measures yesterday over the coming weeks to unblock the frozen credit markets. Brown said: "We know now how important banks are to the system, but if they can't supply finance ... then we have lost an important function that is vital to every part of the country."
The Treasury is considering a range of options to increase the flow of credit including guarantees for commercial loans and increasing the money supply.
Writing in today's Guardian, John McFall, the chairman of the Commons Treasury committee, calls for a state bank - either newly created or based on the Post Office - to take on the role of lending from reluctant commercial banks. "The situation, with private banks freezing up credit, is so serious that consideration should be given to the establishment of a state bank in order to deliver government lending targets," he writes.
- Economic policy
- Mortgages
- Banking
- Credit crunch
- Savings
- Interest rates
- Interest rates
- Bank of England
- Economics
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