Anyone for squash?

In the US, the troubled assets relief programme (TARP) has had trouble getting off the ground, not least because of the difficulty of arriving at a price for the ‘toxic’ securities the government were to buy from the banks. Other countries adopted a different approach for addressing the weakness in bank balance sheets, and the US authorities backtracked.

In mid-November, $250 billion of the TARP fund was diverted to help recapitalise US banks. Half went to nine large banks with a further $40 billion going to assist the insurer AIG. One consequence of the change is that asset-backed bonds are even more illiquid than before with their owners now heavily discounting them in an effort to sell.

Begging bowl

On 24 November, the US government stepped in and bailed out Citigroup, the world’s largest provider of credit cards and the second largest bank in the US. The government provided a $306 billion guarantee on its residential and commercial mortgages and injected a further $20 billion from the TARP fund, adding to the $25 billion invested in October.

The mortgage lender Freddie Mac made a third quarter loss of $25.3 billion largely due to credit related write-downs and asked for almost $14 billion from the $200 billion Treasury fund set up to assist the government sponsored enterprises. Fannie Mae also made a loss – $29 billion – and indicated it might need more than the $100 billion earmarked for its support. The government has now allocated a further $600 billion to support Fannie and Freddie and other issuers.

Most recently, the US government launched TALF – a $200 billion term asset backed securities loan facility aimed at supporting issuance to fund small businesses, student loans and credit card debt. Explorations are continuing as to how TARP funds might be used to reschedule existing mortgages and stem the flow of foreclosures.

The government has pledged to ‘do what it takes’ but the bad news continues to roll in. The Federal Deposit Insurance Corporation has reported 171 banks with ‘problems’ – up 50 per cent in the third quarter. The price of properties continues its slide, with the median price in October showing an 11.3 per cent fall compared to last year, the biggest decline in more than 40 years.

President elect Barack Obama is inheriting a considerable challenge. He has appointed Tim Geithner, president of the Federal Reserve Bank of New York, as his Treasury secretary. Geithner has been closely involved in dealing with the credit crunch and his appointment has been warmly welcomed.

On this side of the Atlantic, the Icelandic banks Glitnir, Landsbanki and Kaupthing all got into difficulty and were placed in administration.

This had a big impact on the UK with individuals, local authorities and institutions having money trapped with little guarantee of it being returned. The government stepped in to extend the UK financial services compensation scheme to the consumer deposits with the cost of any losses being borne by UK lenders, potentially up to £3 billion over three years.

The fallout from Iceland widened when the Barnsley Building Society announced it was merging with the Yorkshire Building Society. This was followed shortly after by the Scarborough Building Society’s proposed merger with the Skipton Building Society.

We are now witnessing a major consolidation in UK financial services and there is almost certainly more to come. In late November, the proposed merger between Lloyds TSB and HBOS was approved by investors despite attempts to prevent it going ahead. Finally, at the end of the month, the attempted £15 billion rights issue by RBS failed and the government, which backed the issue, now owns 60 per cent of the bank. This will be managed by UK Financial Investments, a new agency set up to manage government holdings in the banking sector.

On 6 November, the Bank of England’s monetary policy committee made a dramatic 1.5 per cent cut in the bank rate bringing it down to 3 per cent. This was passed on as a cut in mortgage rates – but it had no impact on the 50 per cent of borrowers with fixed rate mortgages. On 3 December, a further 1 per cent cut was made and we wait to see how this is reflected in mortgage rates – with the FSA making threatening noises that it must be passed on to borrowers.

Perhaps the most significant aspect of the move was the impact on the rate at which banks lend to each other, with the three-month Libor rate (London interbank offered rate), down from around 6 per cent to the current 2.2 per cent. Most non-prime mortgages are priced off Libor, as is the lending to housing associations – and this has eased price pressures in those markets, albeit that the supply of funds remains reduced.

The pre-budget report was published on 24 November with the chancellor announcing a £20 billion stimulus package. It included further adjustments to the ISMI mortgage relief scheme – mortgage limit up to £200,000 for 12 months and keeping the standard rate at current levels (rather than following the interest rate cut) for six months.

Stay of execution

Other proposals were for an increase in spending on social housing, and an agreement with major lenders to delay possession proceedings until borrowers were at least three months in arrears.

The Crosby report on mortgage finance was published at the same time. It recommended the government seek to restart the securitisation market by providing guarantees on new lending (by any type of lender) – a recommendation the government quickly accepted. This was days after Northern Rock announced that it was to close its £35.5 billion granite master trust securitisation vehicle with probable multi-million pound losses for investors. The move was seen as a prelude to other such closures including Bradford & Bingley’s Aire Valley securitisation programme. Crosby also suggested that net mortgage lending in 2009 could be in negative territory – with new lending lower than repayments of existing loans. Given that net lending was £106 billion in 2007 this gives a clear indication of the scale of the contraction and clearly it will be those who need the biggest mortgages or who have the worst credit who will face the greatest difficulties.

The chancellor also announced the creation of a lending panel which will track the supply of mortgage finance. Details of who will sit on the panel have yet to be announced but it will include major lenders, trade and consumer bodies.

This is likely to be the year when the peak of repossessions from the non-prime sector come through as the numbers are boosted by the recession. Some estimates put the figure at between 75,000 and 100,000 possessions – although it is hard to assess the likely effect of the ISMI changes, the pre-action protocol and other recent measures.

Mortgage shortfalls

Lenders will want to slow the possessions process in the face of difficulties they and borrowers will have to confront. RBS/Natwest has already announced it will give a six-month recovery period before action, rather than the conventional three months. On 3 December, the prime minister announced a home owner mortgage support scheme whereby the state would guarantee shortfalls in mortgage interest payments.

House prices are continuing to fall with the reduction in 2008 likely to be around 15 per cent – and 2009 might see another 10 per cent, making a peak to trough decline of 25 per cent a real possibility.

The mortgage market has gone on shrinking with effectively two markets emerging – a low loan-to-value (LTV) market where mortgages are readily available and a high LTV market where they are not. The government continues to seek to expand low cost home ownership. But in the meantime, we can expect a further expansion in the private rented sector and the contraction in home ownership to gather pace.

Peter Williams is executive director of the Intermediary Mortgage Lenders Association.