Sir James is warning that as homeowners are paying off mortgages, banks are putting less money back into the housing market than they are taking out. New net mortgage lending is very likely to fall below zero in 2009 (compared to around £40 billion this year and £108 billion in 2007) with only a modest recovery likely in 2010.
The inability to refinance existing mortgage-backed funding and the continuing pressures in wholesale funding markets which is really hitting the banks' capacity to make new loans.
Mortgage lenders will have to live with little or no access to asset-backed funding through 2008 to 2010, together with having to cope with in excess of £160 billion of redemptions of existing paper over the same period.
“The banking sector is shell shocked, most banks will be focussed on strengthening their balance sheets In such an environment, there are very few banks with the capacity to increase lending.”
In the longer term, therefore, the UK mortgage market is expected to revert to a structure where lenders fund their lending more directly from deposit gathering.
“There is no doubt that extremely well capitalised banks that are supremely confident of their access to affordably priced funding will eventually lend more freely. But it will be some time before this is the case in the UK.”
Final report submitted 24 November 2008.
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