Thursday, 19 March 2009

Mortgage lending continues to collapse

UK lenders issued less than 10,000 mortgages in February; down 15 percent from the previous month and 60 percent from February 2008.

Michael Coogan, CML director general, had a few wry comments to make about the collapse in mortgage lending:

"Retail savings are now the predominant source of funding for mortgages. But banks and building societies have seen savings ebb away to National Savings and Investments, which has a negative impact on their ability to lend.

This is yet another example of fractured policy. There are now fewer active lenders in the market, but the government wants them to lend more. At the same time, the government's own savings institution is sucking away the funds that would enable them to do so. Until funding improves, the capacity of lenders to lend will remain constrained."

Mortgage lenders are caught in a vicious trap. Near zero interest rates discourages retail deposits, which restricts the availability of new funding for mortgages.

The lack of mortgages pushes down demand, and compresses property prices. The property crash reduces the collateral value of existing mortgages, and weakens bank balance sheets. The wholesale funding market cannot recover because the banking system teeters on the edge of insolvency.

At the same time, the government deficit is increasing, sucking up financing which could, potentially, be used to increase mortgage lending. As Mr Coogan rightly says, government policy is fractured. It is also incoherent, shortsighted, and counterproductive.


Unknown said...

The truth is the housing bubble has now well and truely burst and only a few fools are still looking to borrow to buy a property.

If a lender wanted to attact more deposits they could aways increase their rates. But they don't.

Anonymous said...


I like your blog, largely because it is so well-researched. However, you do sometimes let yourself down with poor grammar. It should be "fewer than 10,000 mortgages", not "less than 10,000 mortgages". Keep up the good work.

Young Mark

Anonymous said...

Bit misleading to say that savers aren't depositing their money at the banks. Where does it go then? Are you suggesting that they truly keep money at home under the mattress?
There is only one way that money can be taken out of the banking system, and that is in hoarded paper form. Otherwise just shifting around.
Do you mean an increase in sterling deposits at foreign banks?

Anonymous said...

Anon 17:58,

You raise an important issue;

I didn't quite say that savers aren't depositing their money in banks. I said "Near zero interest rates discourages retail deposits, which restricts the availability of new funding for mortgages."

But to answer your question directly, Coogan of the CML claims it is going on national savings which is actually government borrowing.


Anonymous said...

As they are thought of as a higher risk than NS&I why don't they pay a higher rate of interest then we may choose to save there. At the moment they don't seem to understand that saver need a reward for taking the risk of letting the seemingly silly bankers have their money.

Anonymous said...
This comment has been removed by a blog administrator.