How About Some Funding for Lending?

Robyn Hall

November 20, 2012

I know. It will never happen. But, if the Bank of England expanded the lenders that could participate in the Funding for Lending Scheme, that would actually go a long way to help stimulate the mortgage market.

In July this year, the Bank of England in conjunction with the Treasury launched the Funding for Lending Scheme, which is aimed at – and this is taking the wording from the Treasury’s website – allowing banks to make “more/cheaper mortgages and business loans”. The diagram from the website shows that this will equal “higher spending” and “higher investment” = “growth in the economy”. In summary, the Scheme allows banks and building societies to borrow from the Bank of England for up to four years and the security for these loans can be business loans or mortgages made to their customers. Under the Scheme, the pricing and amount of funding available from the Bank of England, will depend on the volume of lending being done by the relevant bank or building society.

Obviously the Funding for Lending Scheme is a positive initiative for the market as a whole. Anything aimed at increasing liquidity, to those that really need it (such as prospective property purchasers and Small to Medium Enterprises), is a good thing. However, the reality is that the Scheme is not really that radical. At the end of the day, banks could receive funding from the Bank of England before the Scheme anyway.

There are also some general problems with the Scheme which have been voiced by industry experts. They point out that the new cheaper funding made available to those banks participating in the Scheme is likely to result in increased profits for the relevant bank, as opposed to more available credit to end borrowers. It may also make the participating banks less reliant on customer deposits, meaning that there is less incentive for them to increase the measly interest rates offered to savers in the current environment.

More concerning is the fact that there are many signs that the Scheme is not exactly having a dramatic impact – or even any real impact – on the market. According to the Bank of England’s Trends in Lending report, in the quarter immediately following the implementation of the Scheme, lending to SMEs contracted and mortgage approvals remained unchanged. There have been the government spun headlines insisting that the Scheme is helping, which it probably is, but not in a dramatic way. Generally speaking, it would be fair to say that the market has remained in a continued state of stagnation.

Whilst the broader mortgage market remains constrained, the market for short term bridging finance remains relatively buoyant. Whilst I personally think that a lot of the market commentary about the size of the market is far from reality, there is no doubt that there is a sizeable market that is being well served by many of the short term lenders.

Anyone who visited this year’s recent Mortgage Business Expo in London could be mistaken for thinking that there aren’t really that many high street lenders that are actually keen on lending at the moment. Many of the high street lenders were not even at the Expo and this included a few that have even signed up the government’s Funding for Lending Scheme. As the national exhibition for mortgage business, you would have thought that if those institutions were genuinely interested in lending would have bothered to at least have some sort of presence at Expo.

However, the running joke at this year’s Expo, as it has been for the last few years, is that it is increasingly becoming a bridging finance expo. The reality is that in many respects this is a representation of the current mortgage market landscape. You have new alternative lenders that have entered the market with force and are genuinely keen on lending, such as Precise Mortgages (and Aldermore Bank, although they have access to the Funding for Lending Scheme). Then there are the main short term lenders that are also keen on lending, including United Trust Bank, Fincorp, Dragonfly and of course, Montello.

The issue is that these lenders (that are real and genuinely keen on lending) are largely funded by alternative funding sources. Certainly, none of those lenders mentioned have access to any of the Funding for Lending Scheme or any other broad government initiatives to assist with market liquidity. There is talk of the government looking at a new securitisation platform for SME debt which would be absolutely brilliant. However, this seems like it is going to be a long way away, even if it does progress.

If the government was able to push the envelope a little bit further and actually come up with something that is going to assist those that are actually keen to lend, then you could really see the market start to move in the right direction.

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