HOMEOWNERS have been warned they may not see a quick cut in their mortgage rates, despite the government yesterday approving a £50 billion taxpayer-funded lifeline to banks.
The details of a package to allow lenders to swap their mortgage debt for more reliable government bonds – in a bid to inject liquidity into the cash-strapped markets – was unveiled by the Bank of England.
Although Alistair Darling is due to meet
the Council of Mortgage Lenders today to urge banks to pass on rate cuts, there is no condition in the liquidity package.
The Chancellor told MPs: "In the light of everything we are doing with them, I want to discuss with them how they can pass on the benefits of falling interest rates as well as wider government support to mortgage-holders."
The Bank of England has slashed interest by 0.75 per cent in the past five months, but many lenders have actually upped the cost of borrowing to repair balance sheets hit by losses on mortgage-backed investments following problems in the US housing market.
Mr Darling yesterday admitted that there would be no prompt solution. "It will take time because banks are having to build up their capital positions – there is no quick fix," he said.
He said the credit crunch was "probably the most serious shock that we have seen to the financial markets for generations".
Vince Cable, the Liberal Democrat's treasury spokesman, said banks were not being forced to face up to the consequences of their "bad business practices" by allowing them to swap "dubious assets for Treasury bonds".
"If banks are going to receive support from the government, it must be conditional. Banks and their shareholders must bear the brunt of previous bad lending, not taxpayers," Mr Cable said.
But ministers and Mervyn King, the Bank of England's governor, insisted that the scheme, which is the equivalent of half the UK's net mortgage borrowing last year, was not a bail-out and banks would have to repay the money.
"This is a fair way of charging. This is not a gift," said Mr King. The loans are intended as a "one-off, short-term" measure lasting for up to three years.
Mr King said the arrangement was necessary to improve liquidity, restore confidence in financial markets and "protect the rest of the economy" from the credit freeze.
He said: "The aim of the scheme is to increase the liquidity of the banking system as a whole. It's not part of this scheme to take us back to the excessive lending of a year or more ago."
Banks would pay for the privilege – a fee known as a "haircut" – and companies would have to provide assets of a "significantly greater value" than the Treasury bills they received.
The Bank has suggested that £100 of collateral would secure bonds worth £70 to £90.
But questions were raised about how safe the scheme is for taxpayers.
Although the government has said that the Bank of England will only take "triple A- rated assets", critics have pointed out that there are huge discrepancies in the credit ratings.
George Osborne, the Shadow Chancellor, also pointed out that the bonds could be swapped for credit card-backed securities rather than mortgage assets.
Stewart Hosie, the SNP's Treasury spokesman, gave a "guarded welcome" to the financial package but stressed that "early intervention was always better than allowing things to drift on for eight, nine ten or 11 months".
The British Bankers Association yesterday called the scheme "an innovative and unique policy response".
A spokesman said: "The banks expect it to make a significant contribution to alleviating the pressures in the UK money markets. Restoring confidence in the wholesale funding market will strengthen the financial system and the stability of our economy."
But Howard Archer, an economist, said greater transparency was needed from banks on their losses and exposures to the subprime crisis for the scheme to be most effective.
Q & A: CONFIDENCE BOOSTWHAT did the Bank of England announce yesterday?
It confirmed it would lend banks and building societies around £50 billion in the form of government bonds, in exchange for mortgage and credit card debts.
The move, part of a special liquidity scheme, is designed to give banks access to much-needed credit and to free up the logjam in the mortgage market that has been caused by the crisis in wholesale money markets.
Why has the Bank of England acted now?
The credit crunch has triggered a crisis in confidence among banks and investors over bonds secured on mortgages. It was sparked off by soaring numbers of high-risk "subprime" mortgage borrowers in the United States defaulting on their loans.
The lack of appetite for UK mortgage-backed assets has deprived banks of a vital source of funding and has made them more cautious about lending to each other.
Mortgage deals have become more expensive and less available.
How will the scheme work?
Banks taking up the offer to swap mortgage or credit card-backed assets for Treasury bonds will be required to pay a fee, based on the interest rate for which banks are prepared to lend to each other over three months on the wholesale market. The rate is known as the London interbank rate, or Libor.
The scheme will not be used to prop up the mortgage market so new mortgages cannot be used to swap for bonds, only those that have been on balance sheets since the end of last year.
Will taxpayers be exposed to potential losses?
The Bank of England has stressed that the risk of losses under the scheme would be carried by the banks to limit the risk to the taxpayer.
Those companies taking part will also have to provide assets of "significantly greater" value than the government bonds they receive. If the value of their assets pledged as security falls, they must provide more assets to the Bank, or return some of the Treasury bonds.
The Bank is also refusing to accept assets backed by US mortgages.
However, it has said that the public sector would be exposed to a loss in the "very unlikely" event that a participating bank defaulted and the value of the assets it had placed as security with the Bank of England later proved inadequate to cover the value of the government bonds that had been swapped for the assets.
How will this affect the mortgage market?
Despite a possible easing on borrowing, economists said that house prices are still likely to fall, even if mortgage rates do come down. Affordability is still stretched and banks are set to remain cautious, requiring higher deposits from borrowers and being careful over how much they will lend.
Are there catches we should watch out for?
Some of the securities being traded for Treasury bonds are being backed by credit card debt – which is generally much riskier than debts underwritten by mortgages.
While the housing market – at least south of the Border – has cooled, questions remain about how much further it could fall. The International Monetary Fund recently warned that properties in the UK were overvalued by 30 per cent. If prices were to fall by this rate, even the extra amount paid by banks to swap Treasury bonds for mortgage- backed securities would not be enough to cover the debt.
The full article contains 1234 words and appears in The Scotsman newspaper.
