Page last updated at 12:49 GMT, Monday, 19 January 2009

Government pulls lending levers

Analysis
By Ian Pollock
Personal finance reporter, BBC News

A man looks in estate agent's window
The government wants more people to borrow and buy, not just browse

A key feature of the government's plan to stimulate lending by our banks is a direct intervention in the mortgage market.

And it looks like one element will be for Northern Rock to increase its mortgage lending, after a year in which it has been busy trying to get rid of as many existing borrowers as possible.

"Is it appropriate for Northern Rock to do more lending? That's what we are looking at - it's a possibility," said a Rock spokesman.

The government is desperately worried that the drying up of mortgage lending in the past year or so will become even worse as the economy weakens further.

So much economic activity takes place when people move house that making it easier for more people to borrow and move seems a good idea.

And what better way than to use a nationalised bank as a direct lever for that policy?

"The government will also consider further ways of addressing the loss of mortgage lending capacity in markets," said the Treasury.

"As a first step, the government can confirm that Northern Rock is no longer actively pursuing a policy of rapidly reducing its existing mortgage book."

Keeping its customers

This is an abrupt handbrake turn in policy.

We are still reviewing the business plan, as to whether we will let customers access new products
Northern Rock spokesman

For the past year or so, the Rock has been busy writing to all its existing customers and inviting them to go elsewhere, especially when their current fixed-rate deals expired.

The logic was that the money raised when the mortgages were repaid could be handed straight back to the government, to repay the money the taxpayer injected in 2007 to stop the bank going bust.

"A key objective of the company's original plan, previously announced in March 2008, was to repay its government loan, primarily through a programme of accelerating mortgage redemptions," said the Rock.

"This has been very effective and has enabled the company to reduce the government loan well ahead of the business plan," it added.

Hundreds of thousands of Northern Rock customers have been sent letters at regular intervals, telling them they would not be eligible for any of the deals on offer to new customers when their current deals came to an end.

The only alternative would be to go onto the Rock's rather high standard variable rate, which for many current customers would have led to a rise in mortgage payments.

Reviewing the plan

It is not clear yet exactly how the Rock will implement the new policy.

Northern Rock branch
The Northern Rock may start to expand its lending this year

For the moment, people who have already received letters inviting them to move their mortgages are not going to be sent new ones inviting them to stay after all.

It is likely though that no more borrowers will receive letters inviting them to go away.

And a bank spokesman said current customers would, for the time being, not be able to take any of the mortgage deals on offer to new borrowers.

"We are still reviewing the business plan, as to whether we will let customers access new products," he said.

But the logic is that they will, in due course.

And that could see the Rock start to expand beyond its self-imposed limit of taking just 2.5% of all new lending by banks and building societies in each calendar year.

Securitisation guarantees

Other lenders are also getting some government encouragement to untie their purse strings and lend more.

Overall this is a helpful package that we think is much more likely to help lending flow more effectively again
Michael Coogan, CML

Gordon Brown and Alistair Darling have adopted last year's proposal from Sir James Crosby, former head of the bank HBOS, that the tax payer should guarantee new mortgage securitisation programmes.

That means banks and building societies will be able to raise fresh funds by selling glorified IOUs, backed by the income from mortgage borrowers, to international investors.

Michael Coogan, of the Council of Mortgage Lenders (CML), said the idea was helpful, but warned it was not possible to predict how much effect it would have on new lending this year.

"At long last, the government has announced a comprehensive and co-ordinated package of measures sufficiently large in scale to have an impact on improving the flow of new lending," he said.

"As always, the devil will be in the detail but overall this is a helpful package that we think is much more likely to help lending flow more effectively again than the steps that have been taken to date," he added.

Sir James Crosby envisaged that the guarantee would cover 100bn of new mortgage securitisations.

Full details have yet to be agreed, and the scheme will also cover IOUs issued by other businesses, not just mortgage lenders.

But it is aimed fairly and squarely at helping lenders get their hands on new funds and will start from this April.

"Mortgage-backed securities supported a third of mortgage lending and the revival of this market is an important element of increasing the capacity of lenders to provide mortgages as demand increases in future," the Treasury said in a statement.



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