Digesting the Funding for Lending scheme

Digesting the Funding for Lending scheme

Bob Young, CHL Mortgages

It may still be too early to fully digest what impact the Bank of England’s recently unveiled Funding for Lending scheme will have on the UK mortgage market and indeed, the economy itself, but the initial reaction from key industry stakeholders seems broadly positive.

The Council of Mortgage Lenders was one of the first organisations to respond to the proposals, suggesting its implementation would encourage lending, support economic growth and act as a positive influence, but couched this optimism with a warning that individual lenders would have to assess how the funding available under the scheme complemented their own requirements and lending targets. The Building Societies Association was slightly more guarded in its evaluation of the scheme, pointing to its already impressive lending figures for the year and suggesting that it was important to study the detail in the proposals before getting overly excited.

For the uninitiated, the main objective of the scheme is to enable access to cheaper funding to banks and building societies in order to get lending moving again. You’ll be forgiven for wondering if you’ve heard this all before – Project Merlin anyone? However there are some noticeable differences with this scheme. Here, if lenders increase their lending, funding under the scheme becomes cheaper, acting as an incentive to increase activity.

While the Bank has suggested the scheme is not specifically targeted at any particular parts of the market, it goes on to mention business loans and residential mortgages in its statement. The latter point does not necessarily mean that the buy-to-let market will be overlooked, but it is unlikely to be a priority as the government looks to curry favour with first-time buyers, families and businesses.

Either way, the private rented sector still stands to benefit from the proposals in a number of other ways. Freeing up the funding blockage that has been hampering the mortgage market can stimulate activity and help lift the home loan market from the malaise it has slumped into. Lenders that are active in the buy-to-let sector alongside other areas of the market can benefit from cheaper funds in other parts of their business which could have a knock-on effect for their dealings with property investors. In addition, lenders that have been looking to sell books, portfolios or their entire businesses may find they have more suitors once the cogs are turning again.

As with many state-backed schemes, it is imperative that any external stimulation of the market is done in a controlled manner for fear of artificially rigging conditions too far from the natural order. But it is somewhat heartening to see the Bank of England taking affirmative action. The Chancellor struck a defiant tone at the scheme’s unveiling and said the proposals proved the UK is not powerless to act in the face of the Eurozone crisis and that it was a co-ordinated move on behalf of the Treasury and the Bank of England to inject new confidence into the financial system.

To paraphrase Elvis Presley, it seems that the government agrees that the time for conversation is over and it is time for action. Hopefully the scheme will have heeded the rest of the King’s wise words and will ensure that the proposals have the bite and spark to end the funding aggravation.

Bob Young is managing director of CHL Mortgages