Mortgage lenders call for Special Liquidity Scheme to be extended

11 July 2008 / by Rachael Stiles
The UK's biggest high street banks are calling on the Bank of England to extend its Special Liquidity Scheme because it hasn't done enough to ease the banks' credit that they make available to both to the public and each other.

The scheme, launched hastily in April in an attempt to bring liquidity back to the money markets, allows banks to apply for funding in exchange for securitised bonds backed by mortgages and credit card debt.

However, the banks say that this has not sufficiently restored confidence, as they continue to remain reluctant to lend to each other and consequentially the Libor rate remains high, which is then passed on to mortgage customers.

The scheme originally provided a £50billion pool of funding, which was increased to £70billion and may be stretched further to £100billion. One of the banks' requests is thought to ask for an extension to the scheme to include mortgages that were written this year.

As credit remains difficult to obtain, potential mortgage customers are unable or unwilling to buy a house in this difficult economic climate, which has had a far reaching effect on other industries, such as construction companies, builders, electricians, plumbers, and estate agents.

It is thought that as many as 6,000 estate agents could be made redundant this year, which follows reports that housebuilders Barratt Developments, Persimmon, Redrow and Bovis are all laying off employees, the total number of which analysts have predicted could amount to 8,000 by the end of the year.

The culmination of these circumstances is that house prices are falling at the fastest rate since the 1950s when records began, according to the Halifax House Price Index, released yesterday.

The report found that the average house has fallen in value by £17,000 since the beginning of the year, and that they are losing value faster than at any time during the property crash of the 1990s.

Mervyn King, Governor of the Bank of England, has made it clear that the Special Liquidity Scheme, whether extended or not, is not intended as a bail-out for lenders that lent too freely during the boom in housing during the last decade, nor is it designed to rejuvenate the mortgage market.

The financial industry was unsurprised yesterday when the Bank of England decided to leave interest rates at five per cent for another month, pushed between a rock and a hard place with affordability of credit on one side and encroaching inflation on the other.

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