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Bank function

The liquidity squeeze is now biting across the board. In extreme cases, lenders are shutting up shop until further notice while others are withdrawing product ranges, tightening criteria and increasing their pricing. In the sub-prime sector, Future has just withdrawn its very heavy product and Accord has made drastic cutbacks, having already, as with C&G, pulled out of the 100 per cent market and reduced its maximum mainstream LTV to 90 per cent.

The speed with which lenders are pulling products, changing criteria and/or pricing makes it difficult for brokers to keep up and ensure the tight deadlines for cases to be submitted are met. Criteria changes mean that the number of clients for whom no mortgage is available at any price is increasing. Prior to the liquidity squeeze, fierce competition had resulted in the terms available to some sub prime borrowers being over generous, with rates close to typical SVRs on offer from some. A pricing correction was overdue but the speed and severity with which it has taken place is unprecedented.

Last month the bank rate/Libor spread and the gilt yield/swap rate spread widened again after narrowing significantly in December and January. The liquidity squeeze has tightened sharply since the February bank rate cut and lenders have progressively widened their margins against bank rate as their average cost of funds increased and they become more cautious on when conditions in the money markets will return to a semblance of normality. Lenders with funds to lend are increasing rates in an attempt to curtail the number of applications. However, many are finding that higher rates are having little impact on application volumes and hence some are resorting to pulling products completely, at least for a temporary period.

Pay rates on new two-year trackers are about 0.25 per cent higher than last July when the bank rate was 5.75 per cent, compared with today’s 5.25 per cent. The situation is deteriorating so rapidly that there is a very real danger of a disorderly market.

Mervyn King must recognise that the time for teaching the banks a lesson with his talk of “moral hazard” has passed. The ECB and the Fed recognised the depth of the abyss the banking system is staring into some time ago and have provided far greater assistance to the market than the Bank of England. Only last Friday, the Fed announced it would provide a further $200bn to ease liquidity strains. Perhaps the Bank of England has forgotten that one of its functions is to maintain an orderly market.

Ray Boulger is senior technical manager of John Charcol

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