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Rescue fails to salvage specialists

Mortgage commentators have hit out at the Bank of England’s decision to exclude specialist lenders from its £50bn liquidity rescue package.

The Council of Mortgage Lenders and the Intermediary Mortgage Lenders’ Association have both welcomed the scheme but say that specialist lenders should have been included.

Imla executive director Peter Williams says: “It is important that specialist lenders, along with banks and building societies, with AAA-rated mortgage-backed assets should be able to swap them against Government securities. The current situation means that the facility will be relatively restrictive and that lenders with non-prime packaged assets will not be able to tap this source of funding.”

GMAC-RFC managing director for sales and marketing Godfrey Blight says the firm is disappointed that the scheme is not open for specialist lenders.

He says: “I think it will be used by a lot of the banks and building societies and if that starts the ball rolling in the market, that will be good. I don’t think it is the end solution in itself. It will ease some pressures but it is a shame that specialist lenders cannot participate. We are lobbying hard for inclusion.”

Brentchase Financial Services mortgage specialist Mike Fitzgerald says: “I do not think the Government appreciates the true role of specialist lenders in the mortgage market. Those type of lenders are responsible for a lot of lending and have given a lot of help to people.”

Blight says all the central bank’s initiatives so far have been “plug in a hole” solutions rather than looking to create long-term answers. He suggests that the UK needs to follow the US in setting up an agency along the lines of Fannie Mae/Freddie Mac.

Wave director of distribution and sales Mehrdad Yousefi agrees that the facility will not help specialist lenders if they cannot access it directly.

He says: “I cannot see how their funding position is going to be enhanced. The key issue at the moment is to make sure that banks can get enough funding to lend to consumers. There will have to be consideration about the specialist sector in due course. When the dust settles, hopefully there will be further discussion about what else can be done.”

But The OFM Group managing director Andy Sewell believes that the scheme could have some positive impact for specialist lenders.

He says: “If firms like The Mortgage Business and BM Solutions can benefit by HBOS, for example, taking the loans, getting rid of some of their back book and creating space for further lending, it is certainly a step in the right direction. There is an argument to say that if part of the specialist sector is helped in this way, it will give a positive impression to the markets that non-standard lending is sustainable in the UK so there may be a longer-term positive trickledown effect to other lenders.”

John Charcol senior technical manager Ray Boulger also believes the scheme could have some positive knock-on effects for specialist lenders if the spread between bank base rate and Libor is narrowed as a result of the package.

One of the aims of the scheme is to help bring interbank rates down. Banks are required to pay a fee, based on the spread between three-month interbank rates and the three-month interest rate, for borrowing against the security of government bonds.

Banks will be encouraged to swap more assets in a bid to see the fee charge drop.

Blight says: “This is where Mervyn King has been very clever with the charging structure of the scheme. It heavily incentivises banks to bring down Libor.”

Speaking at the launch of the scheme, King said the package would take the “liquidity issue off the table in a decisive way”, adding that he hoped a side-effect of the scheme would be to bring down interbank borrowing rates.

He said the objective of the plan was neither to persuade banks to start lending again nor to stand in the way of a housing market correction.

King warned the scheme was not designed to send the mortgage market back to the “rather wild” lending before the liquidity squeeze hit the market last summer.

He said: “This is not to protect the banks but to protect the public from the banks. There is no way that the banks can access this as a bottomless pit. It is not available for failing institutions. It is to restore confidence in the banking system.”

Boulger says: “If we are still seeing lenders increase their rates in three months time then that would be an indication that the scheme has failed. I think in quarter three this year we will be past the worst.”

Edeus chief executive Michael Bolton has warned that banks are unlikely to pass on the extra liquidity on to borrowers but instead will look to rebuild the capital on their balance sheets in anticipation of a worsening credit scenario.

Last week, he told Money Marketing: “As soon as some of the liquidity returns to the market, you will see banks begin to prepare and anticipate 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.”

This could anger King who has made it clear that he expects banks to look to raise capital through other means, such as following Royal Bank of Scotland’s plan to raise £12bn through a rights issue in a bid to improve capital.

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