A bizarre situation has arisen where mortgage providers have had to defend their lending policies after the Treasury Select Committee of MPs said they are not ‘hungry for business’ and their caution is damaging the market.

The Council of Mortgage Lenders (CML) said its members wanted to help the ailing housing market by helping first-time buyers gain access to finance. But lenders had to weigh this up against the risks of offering ‘undue incentives’ to those wanting to buy. This seems fair enough since it was what brought about the current crisis in the first place. 

The chief UK economist at Morgan Stanley today said it could take a further 5% to 10% fall in prices for the market to ‘stabilise’ and activity to pick up.  

While warning this forecast was an ‘educated guess’, the analyst, who is also a director of the Financial Services Authority, said this level of decline may be needed to move beyond the current ‘very awkward period’ in which many people were shunning the market because they expected prices to fall further.  

Appearing before the Committee, industry representatives faced accusations of not doing enough to support activity in the housing market as prices continue to fall. 

Banks and building societies have sharply cut back on mortgage lending amid the current financial turmoil; the government made an increase in support for homebuyers a pre-condition of its £37bn bailout of a trio of High Street banks.  

MPs said lenders seemed content to hoard cash in the current climate and let the market determine how far house prices should fall, leading to a sharp rise in “traumatic” home repossessions.  

Asked about the current state of the housing market, Nationwide’s chief economist said prices were now falling at a faster rate than in the early 1990s.

In the first piece of good news for mortgage holding homeowners for many months now, mortgage providers have today been lowering the cost of their home loans following the emergency cut in
UK interest rates.

Halifax said it would be reducing its standard variable rate (SVR) from 7% to 6.5% from 1 November. Lloyds TSB, which also lends under the Cheltenham & Gloucester brand, said it would cut its SVR by half a percentage point to 6.5% on the same date. Woolwich and First Direct, part of HSBC, have also cut their SVR’s by half a percentage point.  

However, experts say that house prices will fall despite the respite for homeowners and therefore negative equity remains a threat.  

The Council of Mortgage Lenders issued a statement, part of which reads, ‘all this decisive action augurs well for an improving market situation looking ahead, even though no one is pretending the tough times are over yet.’

 Roughly 7% of mortgage holders have a SVR mortgage so the effects of this rate cuts will be limited. 

The rate cuts came after a co-ordinated move in which the Bank of England along with five other central banks, cut interest rates by half a percentage point to 4.5% earlier today.

The Bank rate cut will offer relief for a third of the 11.7 million UK households with a mortgage, as they are on existing tracker mortgages. The financial website moneysupermarket.com estimated that a family with a typical £150,000 mortgage will be more than £40 a month better off, a saving of almost £500 a year.

But rates for savers are likely to be cut by some providers because of the latest news. National Savings and Investments (NS&I) said it was cutting the returns paid on its ISA following the fall in the official cost of borrowing.  

Government-backed NS&I said interest paid on its Direct ISA was being reduced from 5.3% to 4.8%.  

The CML have also pointed out that actions taken today, including the rescue plans for the banks, are likely to arrest the decline in the availability of mortgages.

The cut in the Bank rate came after falls in recent days in the Libor, the rate at which banks lend to each other and key to mortgage costs.  

The effect of the credit crunch is most acutely visible in the fact that the average five-year base rate tracker mortgage is now 1.07% higher relative to the bank base rate than it was back in July 2006.

Experts have warned that the modest rate cuts announced today could lull borrowers into a false sense of security. Although today’s news will clearly help those with repayment difficulties, borrowers who think they might encounter problems repaying their mortgage should still get in touch with their lender as soon as possible.

Mortgage payment problems are expected to become more commonplace if homeowners start to lose their jobs. As unemployment rises here in the UK these problems are only going to get worse. 

The Royal Institution of Chartered Surveyors (RICS) has forecast that UK unemployment will soon rise above two million.  

With the markets sliding relentlessly downwards despite the best efforts of governments and central banks it shows that actions as dramatic as today’s are simply keeping economies around the world from the abyss of total meltdown. Recovery itself is a long, long way away.