He points out that UK net mortgage lending totalled £108bn last year. He says of this, only £27 billion ended up on the books of banks and building societies.
The other £81 billion was assumed by “other specialist lenders” – often bank subsidiaries largely funded in wholesale markets.
Ward says: “Reflecting the shut-down of wholesale funding, these specialist lenders reduced their mortgage book by nearly £5 billion in the first two months of 2008. Assume – optimistically – that their net lending is zero for the year as a whole. If mortgage demand remained at £108 billion, and banks and building societies planned again to lend only £27 billion, this would imply a “funding gap” of £81 billion.”
However, Ward suggests the actual gap is likely to be significantly lower, for three reasons.
First, banks funded £10 billion of the £81 billion advanced by specialist lenders in 2007. This £10 billion will be available to finance their own lending in 2008, reducing the estimated funding gap to £71 billion.
Ward adds: “Secondly, mortgage demand would have fallen as a result of Bank rate rises and a slowing economy even in the absence of the recent tightening of lending standards. In the last housing slowdown in 2004/5, when supply conditions remained generous, the 12-month running total of net mortgage lending declined 22 per cent from peak to trough. A drop in mortgage demand on this scale in 2008 would cut the implied funding gap from £71 billion to £47 billion.”
Thirdly, a portion of the funds that last year were invested in wholesale markets will this year end up in bank and building society deposits, creating extra lending capacity.
Ward says: “Of course, any contraction of specialist lenders’ mortgage books would offset these factors, boosting the funding gap. Based on the above, a reasonable view is that the authorities need to offer about £40 billion of additional funding assistance to mortgage lenders this year.”