Jeff Salway: Lenders won't help buyers without yet more state support

THE doubling of the stamp duty threshold a month ago raised hopes that first-time buyers would lead the housing market back to some form of normality.

Yet not only is such a recovery unlikely, but the loan rationing of the past two years may have nothing on the mortgage famine that will arrive next year if no action is taken to address the funding shortfall facing lenders.

The Council of Mortgage Lenders this week reiterated its February warning that the 300 billion funding gap left by the collapse of wholesale funding markets was only being temporarily plugged by state support, in the form of the special liquidity scheme (SLS) and the credit guarantee scheme (CGS).

The SLS has provided lenders with around 185bn that will need to be repaid to the Bank of England by 2012, while under the CGS 134bn of redeeming bonds have to be refinanced by 2014.

However, those repayment schedules look more optimistic with every passing day and the sources of funding that the schemes were designed to compensate for have not recovered. Despite that, the government has kept its counsel regarding the role that securitisation – in the form of residential mortgage-backed securities – will play in funding the market when its support is withdrawn.

Paul Samter, the CML's economist, predicts that while the housing market will gradually improve this year, the withdrawal of government support will put the skids under any recovery.

Consequently, unless the credit environment improves dramatically – which is highly unlikely – or the government takes action, the mortgage finance available will be limited even further, and we can expect what ratings agency Moody's claims could be a mortgage famine next year.

It estimated that banks and building societies borrowed a total 319bn in 2007 and 2008 when wholesale markets collapsed, equivalent to a quarter of the UK's residential mortgage book. Unless government funding is extended or alternative finance made available, Moody's has predicted, lenders will tighten their criteria even further from the beginning of 2011.

The consequences are obvious – the housing market will remain mired in the doldrums for years to come and will be characterised even more than it is now by limited and selective lending with first-time buyers lacking substantial deposits increasingly frozen out. In fact, some lenders appear to be pre-empting this shift to quality. Both Royal Bank of Scotland and Lloyds Banking Group are increasingly targeting wealthier borrowers through their private banking operations as they seek to meet lending targets set by the government.

Homes for Scotland echoed the CML's fears in yesterday's Scotsman, when it described the lack of political plans for correcting the funding constraints on the housing market recovery as "extremely worrying". It said the next government will need to take urgent action to tackle the problems inhibiting the mortgage market, namely the availability and funding of mortgage finance.

Yet none of the main parties addressed the mortgage funding issue in their election manifestos. The next government – blue, red, yellow or a garish blend of the three – will come under early pressure to review its help for the mortgage market. The current government has introduce various piecemeal initiatives, such as the temporary stamp duty holiday, last month's increase in the threshold for first-time buyers and support for borrowers struggling to make their repayments.

But if the funding shortfall is not tackled, the stamp duty increase hailed as the flagship policy in the Budget will amount to no more than a gimmick. It could be argued that any first-time buyer able to fund a purchase in the current market should not be entitled to such a tax break.

The success of the aid for struggling homeowners has also been deceptive. That repossessions have not approached the levels of the early 1990s is more to do with low rates helping homeowners maintain payments and, to a lesser extent, lower house prices deterring lenders from repossessing. This will change for the worse over the next year, as will the mortgage market unless decisive action is taken this summer.