Banks Squeal Under Government Pressure

In a report published yesterday, the Council of Mortgage Lenders has tried to fight back against government demands by saying that their policy objectives are conflicting and incoherent, and that they need to decide on its key priority. However there are many who believe that the statement is nothing more than corporate toy throwing and foot stamping from those who can no longer have it all their own way.

Michael Coogan, CML Director General of the Council of Mortgage Lenders, said:

“To different degrees lenders are facing conflicting pressures to recapitalise against possible future losses, service government’s preference shareholdings at 12%, pay a premium to access the Bank of England Special Liquidity Scheme, show forbearance to borrowers in arrears, follow base rate moves down to help their existing borrowers, keep savings rates high to support existing savers, and provide competitive rates to new borrowers and savers to maintain economic activity in a recession. “And they are supposed to ensure their long term financial stability to help the UK economy rebuild itself when we are out of the recession.

“Current policy objectives are conflicting and incoherent. The government needs to decide on its key priority. The tug of war with lenders being pulled in every direction at once needs to end.

“We believe the government urgently needs to review the cumulative effect of the approach it has taken in the recapitalisation process on large lenders’ willingness and capacity to lend.

“Ultimately, the response of each lender – whether on commitments to follow base rate moves or to finance new business in the future - will depend on its access to, and the price of, its funding.“

What is missing from Coogan’s statement is any explanation of why lenders are being pulled in all directions, much of which is their own doing. In a statement issued earlier this month, Vince Cable, Lib Dem Treasury spokesman stated:

“The banks are frightened stiff. They are hoarding whatever capital they have. And, having lost billions in high-risk speculative ventures, they are now trying to squeeze higher margins from low-risk, reliable, British borrowers.”

It is hard to disagree with this viewpoint when mortgage lenders are offering reasonable deals only to those who have a deposit or equity of at least 25%, and more often 40%. With a 15% deposit, potential borrowers are looking at an average rate of between 6% and 7%, and the few remaining mortgages available to those with a 10% deposit are all in excess of 7% with very high fees.

In a housing market which has fallen by some 15% in the last year, and with lenders’ valuers actually giving values up to 30% lower, it is not just those looking to buy who are suffering. Most of the real difficulties, and much of the increase in the numbers of accounts in arrears is being experienced by those who stepped onto the housing ladder in the last five years or so.

It has always been the case in the past that those coming to the end of a low introductory rate would have a choice of competitive rates from the same or other lenders. Now, the refusal of lenders to make products available means the choice for many is simply to pay the lenders standard variable rate. It is hardly surprising then that borrowers are likely to suffer hardship if their fixed rate of between 4% and 5% comes to an end and their only option is a standard variable rate which in some cases, even now, is still near 6%.

Of course the government want lenders to pass on rate reductions, it avoids crippling payment shock for many of the countries newest home owners, it avoids reductions in disposable income, and therefore spending and it lessens the chances of arrears and repossessions. It is quite obvious to many that if lenders had continued to offer competitive loans to those with sensible deposits of around 10%, and competitive follow on rates for existing customers, then there would be much less of a requirement for the government to be robust in their encouragement, regardless of the amount of taxpayers money given to the banks.

For much of this year the lenders have been a major part of the problem, and it is now essential that they become part of the solution. If they refuse or are reluctant, it is beholden on the government to both encourage, and where necessary compel, regardless of how loud the squeals of objection become.

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