Thursday, 17 April 2008

The treasury bails out the banks?

So there is news this morning that the Treasury is coming up with a plan to allow the Bank of England to swap Government debt for lender's mortgage debt.

As long as the tax payer does not get stuck with that dodgy mortgage debt and the bank shareholders are liable, it sounds like a good plan.

It should free up some liabilities and allow lenders to move cash more freely and offer lower rates.

But does this solve the problem of a looming house price crash.

In my opinion - No.

We are back to the last battle again. High interest rates are not going to tip the majority of borrowers into repossession.

The high price of houses is due to lenders relaxing their lending criteria to reckless levels. This is now being tightened up, resulting in less money being available for home purchase.

The battle was lost 6 years ago when the government did not question the lending practices.

How was Northern Rock allowed to lend 6 times income at 85% loan to value and guaranteeing not to check the stated income?

The battle was lost and now the rout must finish, before normal service can resume.

House prices will fall until the price/earnings ratio returns to trend. It is around 30% above trend now.

And just for a note to politicians, when lenders lend 125% of the property value (NOW GONE) or multipliers of 4.25 joint income (STILL GOING ON) or don't check incomes (STILL GOING ON)
there is a fundamental problem and you must intervene.

In the last crash lenders would lend over 100% at higher than normal multipliers, but they did at least check incomes. And we know how bad that crash was.

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