Mortgage drought set to continue for two more years

Permalink: Mortgage drought set to continue for two more years
by Kay Murchie

An assessment of the outlook for mortgage finance has been published today by Sir James Crosby, deputy chairman of the Financial Services Authority.

Sir James, former chairman of Halifax owner HBOS, believes that the lack of mortgages for homeowners and prospective buyers is expected to continue into 2009 and 2010.

The report comes after the Bank of England revealed today that the number of new mortgages approved for house purchases has fallen by 68.4% in the year to June - the lowest level since records began in 1993.

Since the credit crunch commenced last summer, there has been a freeze on mortgage lending as banks and building societies struggle to obtain funding. This has led to a fall in house prices and house sales as only ‘low risk’ customers can secure a mortgage.

As a result, many industries are suffering with housebuilders laying off thousands of staff and companies such as Wolseley, a distributor of plumbing materials, announced it is reducing its workforce.

Sir James was asked by the Treasury to lead a review into improving wholesale mortgage funding to free-up the market but he said there is no quick solution.

He is not in favour of setting up a US-style government-backed mortgage agency like America’s Fannie Mae to reignite the UK market but did indicate that British banks could be allowed to swap new mortgages for government debt.

This would build upon the existing scheme that was established by the Bank of England a few months ago, which allows banks exchange parcels of mortgages, known as mortgage-backed securities, to sell in the market for government debt.

The Crosby Review will give its final recommendations on how to improve the situation in October, which will coincide with the Pre-Budget Report.

The Council of Mortgage Lenders is urging ministers to act quickly to resolve the situation. The Council warned that mortgage lending will halve this year and have a devastating affect on the housing market.