Is £50 billion Bank of England mortgage scheme enough?

22 April 2008 / by Joy Tibbs
The response to the Bank of England decision to allow mortgage lenders to swap mortgage-backed assets for government bonds has been extremely mixed. While some groups believe the plan will help the mortgage sector get back on its feet, others feel it will not do enough to restore lender or consumer confidence.

The Intermediary Mortgage Lenders Association (IMLA) welcomed the move. Executive director, Peter Williams, said: "The beauty of the arrangement is that it is absolutely not a bail-out and lenders will remain responsible for any losses - so avoiding the 'moral hazard' that discouraged Mr King from supporting Northern Rock back in September.

"Despite its limitations, we must regard this as a positive step in terms of kick-starting the mortgage industry, and it should reduce negative pressures in the housing market and in the wider economy."

The aim of the new 'special liquidity scheme' is to encourage lending between mortgage companies. Providers have been extremely cautious about lending to one another since the US sub-prime crisis hit last summer.

Director general of the Council of Mortgage Lenders (CML), Michael Coogan, also spoke fairly positively about the Government scheme. "This is a welcome move by the Bank of England, previously requested by the CML, to address the liquidity shortage which is undermining the markets and keeping LIBOR stubbornly high," he said.

However, he points out that: "What the scheme does not do is give all mortgage lenders direct access to the new funds. In particular, it does not include smaller building societies and specialist lenders."

Similarly, director of the Association of Mortgage Intermediaries (AMI), Richard Farr, said: "The £50 billion discussed looks like a substantial number but there are caveats that must be considered. If the larger lenders simply hoard the liquidity, to shore up their capital reserves or to provide more certainty for regulators, the consumer will not benefit - and neither will smaller lenders who have experienced the most pain to date."

New Star's Simon Ward goes as far as to say that the effect of the scheme will be "disappointing" because of the fees involved.

He says: "The fee payable on a swap of mortgage-backed securities for Treasury bills will be the spread between three-month LIBOR and the three-month gilt repo rate - currently about 100 basis points…Their total cost of funding - including the fee - will therefore equal LIBOR.

"The relatively restrictive nature of the scheme suggests the LIBOR-Bank rate spread will remain elevated and the onus will be on the Bank's Monetary Policy Committee to bring market rates down via further cuts in its Bank rate."

© Fair Investment Company Ltd