Government Plan to Aid Mortgage Liquidity

Posted 2008-04-29

With the mortgage and secured loans market suffering from the fallout of a global credit crunch and finding it increasingly expensive and difficult to obtain funding from the chief money markets with the resultant greatly decreased liquidity, the government has taken unprecedented steps to launch what is possibly the largest targeted initiative made by the financial authorities in recent times.

The new initiative, approved by the Conservative Party who are keen to initiate the plan immediately, will encourage the exchange of mortgage based assets for government bonds, thereby driving the mortgage market and secured loan markets forward again by increasing liquidity.

Despite some objections, notably from Liberal Democrats who fear that the government initiative could incur greater financial liability for the taxpayer, the Conservative Party shadow chancellor indicated that it was imperative to unlock the financial system in order to relieve the difficulties being faced presently by consumers involved in the mortgage and secured loan sector.

As a result of the pandemic credit crunch, passed on initially from the United States mortgage markets last year, the UK market has experienced significant difficulties, including a sharp tightening of lending criteria, a vastly reduced number of mortgage products available, and not least an increase in the overall cost of borrowing despite the Bank of England announcing three successive cuts in the base rate since last December.

It is hoped that the implementation of the new measures will help to diffuse the growing criticism by some financial authorities, including the Treasury, over the amount of time the Bank of England has taken to seriously address the growing issue.

The government initiative comes on the back of a recent report stating that already home and mortgage markets have slumped in the region of 50% within a year. According to published figures, properties sold through estate agents have dropped by 50% in comparison to the previous March, and the number of consumers successfully securing a mortgage has consequently reduced by around 46%.

The Report from the National Association of Estate Agents, comments that its members were responsible for selling 14 properties on average in March 2007: In the same month of 2008, the average sale per member was down to just seven. Unsurprisingly, comparisons are now being made with the period during the late 1980s when the property market was its lowest ebb in recent history.

As it currently stands, the amount of actual mortgage lending has now declined to the lowest monthly figure since 1997.

According to the British Bankers’ Association (BBA), the figures are the worst since the organisation began compiling approval data, with just 35,417 new approved mortgages in March this year, down 18% on the previous month.

For many of the hardest hit consumers in the present climate, the options are no longer between taking out a new mortgage, applying for an unsecured loan or remortgaging, but have come down to a choice of filing for bankruptcy, taking up a Debt Management Plan (DMP), or an Individual Voluntary Arrangement (IVA), with the Citizens Advice Bureaux and government and corporate debt management agencies being swamped for advice by financially harassed members of the public.

However, the independent financial site Debtwatchdog has pointed out that it is not always easy for these people to get the correct advice, with many financial institutions, together with bank and credit card companies, reluctant to encourage consumers from taking up an IVA, or, in Scotland, a Protected Trust Deed (PTD), and thereby indirectly reintroducing the stigma once attached to insolvency.

The uSwitch financial comparison website appears to put some of the blame for the current financial situation on the financial institutions themselves, claiming that 70% of unsecured loans were issued last year without any proof of income.

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