He points out that UK net mortgage lending totalled £108bn last year and only £27bn ended up on the books of banks and building societies.
The other £81bn was with “other specialist lenders”, which are often bank subsidiaries largely funded in wholesale markets.
Ward says: “Reflecting the shutdown of wholesale funding, these specialist lenders reduced their mortgage book by nearly £5bn in the first two months of 2008. If mortgage demand remained at £108bn, and banks and building societies planned again to lend only £27bn, this would imply a funding gap of £81bn.”
But Ward says the gap should be lower than £81bn. He says banks funded £10bn of the £81bn advanced by specialist lenders in 2007. “This £10bn will be available to finance their own lending in 2008, redu- cing the estimated funding gap to £71bn.”
He also says demand would have fallen due to rate rises and a slowing economy even in the absence of the recent tightening of lending standards. Ward suggests that a drop in mortgage demand could see a cut in the implied funding gap from £71bn to £47bn.
Ward adds: “A reasonable view is that the authorities need to offer about £40bn of additional funding assistance to mortgage lenders this year.”