Osborne picks the wrong mortgage target to criticise

Posted on 26 November 2008 by Ray Boulger

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George Osborne was wrong today to criticise Northern Rock for increasing their fixed rates by 0.2 – 0.3%. For such criticism to be fair it is necessary to take account of how competitive their previous deals were and likewise how good the new deals are. Northern Rock’s previous best deals were 3.99% fixed for 1 year and 4.89% fixed for 5 years and both these rates were the absolute best deals in the market for anyone wanting a 1 year or 5 year fixed rate up to their maximum loan to value of 65%. Bearing in mind all Northern Rock's fixed rates are available up to £1m, all are fully flexible and on remortgages they all get for a free valuation and free legals even the new slightly higher rates are still very competitive.

Northern Rock, like every other lender but more so, has a very limited amount of funds to lend and because their previous product range included these 2 market leading rates they would no doubt have received applications well in excess of their ability to continue lending if they had not increased their rates. Under the nationalisation terms Northern Rock are not allowed to originate more than 2.5% of new mortgages in any one year.

What Osborne should be strongly criticising is The Chancellor’s abject failure to act promptly on the Crosby Report’s proposal that the Bank of England should guarantee the issue of new mortgage backed securities. Such action would provide a much needed boost to the funds available for new mortgages but Alistair Darling has chosen to file the Crosby Report until he dusts it down for next year's budget. Urgent action on Crosby’s main proposal would provide a significant increase in the funds available for new mortgages and the resulting extra competition (there is virtually none now) amongst lenders would mean lower rates and possibly even a reasonable choice of deals for borrowers with only a 10% deposit (or 10% equity if remortgaging).

Crosby estimated that net new mortgage lending next year would be in negative territory without further Government help and his most urgent recommendation, or in his words the recommendation “of more immediate import,” was that the Government should guarantee the issue of around £100bn of mortgage backed securities in 2009 and 2010. If this £100bn was split equally across the two years it would transform the mortgage market next year, pushing net lending up to at least this year’s level, which is estimated by the Council of Mortgage Lenders to be £40bn (down from £108bn in 2008) instead of a negative number.

This won’t solve the funding problem but it would result in a major improvement on where we are now. With the mortgage market starved of cash there is limited value in commissioning a “Report on Mortgage Finance” and then waiting months before getting round to implementing its key proposal. I have lost count of the number of times Gordon Brown has recently said he “will do whatever it takes.” He is certainly not doing “whatever it takes” to implement the Crosby proposals. Actions, or in this case lack of them, speak much louder than words!

Categories: Property market, Bank of England, Mortgages, Interest rates

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