In an interview with Money Marketing, Bolton says the liquidity squeeze which took hold of the UK mortgage market last August is set to worsen due to Government inaction.
He does not think anyone with inside knowledge of the mortgage market accepts any validity in the Government delaying “inevitable decisions” until now and claims it will be two to three years before borrowers start to feel the positive effects of the Bank of England’s £50bn move to allow banks to swap potentially risky mortgage debt for Government bonds.
Bolton says banks will use the extra liquidity to rebuild the capital on their balance sheets in anticipation of a worsening credit scenario and tougher global regulations.
He says: “Unfortunately, the delay of the UK authorities in acting means that we are probably going to have a longer and deeper recession that we ought to. If they had begun acting last September and actually managed what is frankly the worst banking crisis in 80 years, this would not be the case. I know that sounds dramatic but this is a banking crisis, not a credit crisis.
“The last credit crisis we had was in the 1990s but that was not a banking crisis. Unemployment went up, there were high interest rates and people could not afford their mortgage. That is a normal cyclical credit crunch. A lack of liquidity and banks not wanting to lend to each other, that is something we have not seen since the late 1920s.”
Bolton believes the money markets can start to work better once the Bank of England’s swap deal takes effect but he is also concerned that more trouble is in store. “The first wave has crashed over our economy, which is the liquidity squeeze. Unfortunately, we are now bracing ourselves for the second wave that is about to crash -the credit crunch,” he says.
Bolton says UK borrowers will only start to see the benefits of the Bank of England’s decision on the other side of the credit crunch.
He says: “As some of the liquidity returns to the market, you will see banks begin to prepare and anticipate for the next few years. You are not going to see them rushing out increasing loan to values and criteria. They are going to rebuild the capital on their balance sheets in anticipation of a worsening credit scenario and in anticipation of regulators globally seeking banks to be more risk-averse.”
Bolton warns that global authorities must wait until the economy is able to stomach an increase in regulatory burden. He says: “You do not do it at the bottom of the cycle, you do it as you are moving back up through the cycle. You do not want to make the situation worse by requiring banks to hold more capital.”
Bolton says if the Government and the Bank of England are serious about finding a solution to the crisis, they should package the extra liquidity with a 1 per cent cut in base rate.
He warns that current market conditions mean it is inevitable that the intermediary share of the market will fall but by how much depends on how aggressive banks and building societies are with their direct channels.
He says: “The sad thing about this market is that the type of lender who is the biggest fan of the intermediary – the type of lender who has brought the best technology into the market, the type of lender who has brought an increase in choice – is exactly the sort of lender who has been squeezed out of this market.
“This market does not allow for any form of non-balance-sheet lender. You have to have a balance sheet to survive in this market.”
He says this is why Edeus has been re-engineering itself over the last four months to become what he calls an “asset management” servicing business for the UK mortgage market.
He says the firm has yet to decide where its mortgage origination business fits with this new model but it is maintaining its presence in the lending market.