£50billion of bonds to rescue UK mortgage market

21 April 2008 / by Rachel Mason
The Chancellor is expected today to announce plans to pump £50billion into the UK's financial system in an attempt to ease the country's struggling mortgage market.

In a controversial scheme, the Bank of England is to 'lend' banks £50billion worth of Government bonds in exchange for their mortgage–backed assets.

Alistair Darling hopes that the bonds, which will mark the biggest ever cash injection by the Bank of England, will lead to cheaper mortgage deals and help ease tension in the UK mortgage market.

When the sub-prime crisis hit the US last summer, the knock-on effect was a global credit crisis; banks became increasingly unwilling to lend to one another, which in turn, meant they were reluctant to lend to the public. Lenders throughout the UK began pulling mortgage deals – thousands were withdrawn from the market in a short period, including all 100 per cent deals - leaving borrowers and in particular, first time buyers, struggling to get credit.

The plans have been welcomed by lenders, with the British Banking Association voicing its support for the plans; a spokesman said: "In principle, if this is an injection of liquidity, we are all in favour.

"We have been supportive of the Bank's moves in recent months but, if as reported, the Bank and the Government are now moving to provide significant and sustained liquidity, we are very supportive."

And in a statement today, the BBA said: "The banks are participating in this arrangement and expect it to make a significant contribution to alleviating the pressures in the UK money markets. Restoring confidence in the wholesale funding market will strengthen the financial system and the stability of our economy."

Michael Coogan, director-general of the CML was slightly more wary, however, saying that it was difficult to know at this stage how much mortgage lenders will actually benefit because it is not clear yet if specialist lenders who do not have mortgage-backed securities will be involved.

The scheme will see the Bank of England exchange low risk Government bonds for potentially risky mortgage debts, and if borrowers default on their mortgage payments it will be the taxpayer that is left with the debts. Vince Cable, the Liberal Democrats' Treasury spokesman says taxpayer's money should not be put at risk.

"We cannot have a situation where the banks are able to privatise their profits and nationalise their losses," he said.

"Since the mortgage from the banks are of inferior quality and higher risk than the Government bonds which they are replacing, the implication must be that taxpayers are shouldering the risks and losses."

But the Government argues that the scheme – a short term measure planned to last for around three years - will be structured in such a way that the risks remain with the banks.

For example, the banks' mortgage-backed assets will be valued lower than their worth and it is also thought that the Government will insist the banks disclose the losses on their mortgage books and put forward plans to rebuild their balance sheets; RBS is expected to lead the way on this by asking its shareholders to raise between £10billion and £12billion.

"The idea behind it", he said, is that "it will begin the process of opening up the mortgage market, which will help householders," the Chancellor told BBC 1's Andrew Marr programme yesterday.

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