Plan to increase mortgage availability

Doubts have been cast on a Government scheme announced in the Budget to help mortgage lenders raise billions of pounds of new funding from the money markets.

Experts said the plans to guarantee residential mortgage-backed securities, which banks and building societies used in the past to raise wholesale funding for new lending, will do little to improve the availability of mortgages.

The Government had previously promised up to £50 billion for the Asset-backed Securities Guarantee Scheme, but yesterday the Treasury admitted that it “did not expect uptake to be particularly high”, quashing the hopes of millions of homeowners unable to get a new home loan.

Tony Ward, of Home Funding Limited, a mortgage finance specialist, said: “There is not a market for these assets and the fact that the Government has offered to provide a guarantee is unlikely to help.

This scheme has been painted as an answer to the shortfall in wholesale funding but in reality we will see little impact on the mortgage market for the foreseeable future.”

The deadlock in wholesale funding has seen a chronic shortage of available home loans over the past year, exacerbating the collapse in property prices.

The average home has fallen 16 per cent in value in the last 12 months, figures from the Nationwide show.

The number of mortgages has slumped from 16,000 in 2007 to around 1,200 today, according to Moneyfacts.co.uk, the financial website. Over the last year, lenders have tightened criteria and limited competitive deals to borrowers with hefty deposits.

The Council of Mortgage Lenders, a trade body, released figures yesterday showing a 16 per cent rise to £11.5 billion in mortgage approvals last month compared to February, but admitted that it is still down 52 per cent on the same month in the previous year.

At the peak of the housing market in June 2007, gross mortgage lending hit almost £35 billion. In 2007, around a third of new mortgage lending was funded through residential mortgage-backed securities and the total market was worth almost £300 billion.

However, in the aftermath of the credit crunch, which first emerged in September 2007, investors avoided mortgage-backed securities because of the question marks over the quality of the loans which had been pooled together.

The guarantee scheme, which was given the green light by European regulators earlier this week, is based on recommendations made by Sir James Crosby in his report in the mortgage market released last year.

Under the rules of the Asset-backed Securities Guarantee Scheme, only AAA-graded mortgages issued since January 2008, with loan-to-value ratios below 90 per cent, can be included by banks and building societies.

Chris Ames, head of asset-backed investment at Schroders Investment Management, said: “Conservatively structured AAA-rated securities, backed by recently originated mortgages, should be a good investment whether there is a Government guarantee in place or not. But for the past 18 months or so, the high yield that investors require has kept banks from selling new securities.”