Lenders seek aid to help fund home loans

Mortgage lenders are mounting pressure on the Bank of England and the Treasury to assist them to raise funds in order to supply homebuyers with loans. They have very strong concerns that without their assistance and support the level of spending will suffer a serious drop.

Industry groups such as the Council of Mortgage Lenders, the European Securitisation Forum along with private banks have thrown their weight behind this request. The aid they seek is called securitisation, which basically sees bankers turn loans into bonds and other financial tools.

More so in recent years, securitisation has played a key role in the British mortgage industry acting as a crucial funding source for lenders. However, since August banks have managed to sell little or no mortgage-backed securities in Europe in a public offering.

Throughout 2008, mortgage lenders are afraid of a shortfall of lending as the figures are forecasting an estimated outstanding value of UK mortgages to rise by £90bn, yet new deposits from retail and institutional customers are only estimated to be £60bn. If this £30bn shortfall becomes a reality, lenders could be forced to slash the amount of loans they can provide to households and seriously harm the economy as a whole.

A senior banking official reports that if the securitisation market stays closed, then it could turn a liquidity problem into a real credit issue.

One of the suggestions from the bankers is that the Bank of England make a permanent commitment to accept mortgage loans as collateral in its own money market operations. Another suggestion s that the government underwrite some issues itself, or invest public funds in the securitisation market.

Of course not everyone agrees with these proposals, for example, the Bank governor, Mervyn King said, ”Taking the easy option and giving in, in the short run without looking to the long-run consequences of those actions is damaging.”

The Treasury is keen for the industry to look within itself and come up with a market solution.

It is predicted that banks are likely to make an example of the government’s plan to underwrite the securitisation of its loans to Northern Rock, which amounts to making the loans risk-free. It is widely expected they will argue that if the public sector can assist one lender, then it should provide the same level of assistance/support to others.