Ha ha ha! Couldn't have happened to a nicer bunch of blokes!

From The Telegraph:

Shares in Britain's housebuilders fell sharply on Thursday after the Bank of England unexpectedly scaled back a scheme to boost mortgage lending.

The central bank said it would refocus the Funding for Lending scheme on loans to small firms in the face of rising house price inflation.

The news had an immediate impact on shares in the housebuilding sector, with Barratt Developments, Britain's biggest housebuilder by volume, tumbling 9.6pc, Taylor Wimpey dropping 7.8pc and Persimmon falling 6.3pc.

The whole housebuilding sector was dragged down by the surprise announcement with Berkeley Group, Crest Nicholson, Redrow, Countrywide, Galliford Try, and Bellway all losing ground.

Great British Understatement

From The Guardian, no less:

... in a letter to Treasury select committee chairman Andrew Tyrie, published on Thursday, Carney makes clear that while the Bank's financial policy committee (FPC) could advise the government at any time if Help to Buy is putting financial stability at risk, the final decision about if it should continue will lie with the Treasury.

"The FPC has no power to require the Treasury to vary the terms of, or close, the Help to Buy scheme," Carney writes in reply to a letter from Tyrie earlier this month asking him to clarify the Bank's role. "The FPC only has the authority to make recommendations in connection with such matters … the FPC is not constrained by the government's timetable for any such advice; it could make recommendations at any time."

That message appeared to contradict statements by senior coalition figures, including Conservative chairman Grant Shapps, who told BBC Radio in September: "We put the Bank of England solidly in charge of this scheme. We've said to them: 'You look at this every year, and if you're not happy with this Help to Buy Scheme, then you'll be [able] to cancel it."

Deputy prime minister Nick Clegg said of the policy last month: "Of course we need to moderate it, even turn it off if we think it is not appropriate and is providing inappropriate stimulation to the housing market. That is precisely why we have transferred the right to do that to the Bank of England so they can keep an eye on it – not politicians, not George Osborne, not the Treasury."

Well, obviously not.

From City AM:

HOW THE [HELP TO BUY] SCHEME WORKS

Banks pay the government for a guarantee. If the customer defaults on their mortgage, the government covers almost all of the guaranteed portion.

This guaranteed portion will be up to 15 per cent of the mortgage. In the event of a default, the Treasury will refund the banks for almost all of portion.

The scheme is split into three tranches: 90 to 95 per cent mortgages; 85 to 90 per cent; and 80 to 85 per cent. The fee varies for each, at 0.9 per cent of the loan at the top end, 0.46 per cent in the middle and 0.28 per cent at the bottom end.

It is expected that the fees cover the cost of the scheme and defaults exactly, leaving the Treasury with no profit or loss. If it looks like that break-even point will be missed, the Treasury can raise or cut the fee to match.

OK, that 0.9% is one-off fee for seven years' worth of insurance cover = 0.13% of the loan amount per year, and the sum insured (maximum payout) is 15% of the mortgage (other sources say 15% of the price paid for the home).

They say that the Treasury will break even on this, in other words they do the risk pooling and will have to pay out that 15% on about 1 mortgage in 116 each year (15% sum insured divided by 0.13% average annual charge). We also happen to vaguely remember than on average, only about 1 in 300 mortgaged homes end up being repossessed, not 1 in 116.

This is a risk pooling, not a risk spreading exercise.

Seeing as banks create tens of thousands of mortgages each year and will possibly lose a bit of money on 1 in 116, they can self-insure. All they have to do is charge high loan-to-value borrowers an extra 0.13% interest put take a small part of the total interest (call it 5%) paid by good borrowers and use it to cover their own losses.

But they weren't doing that themselves and the interest rate charged on high loan-to-value mortgages was much higher than for low loan-to-value mortgages (One per cent higher? Two per cent?).

Therefore we must assume that the risk is considerably higher than the 0.9% fee suggests.

Or possibly the explanation is as simple as this:

The banks do get some cost relief when they make these loans. Instead of facing a hefty capital requirement charge for issuing risky, high loan-to-value mortgages, the government guarantee means they are treated as relatively safe and so cost less.

In other words, the government is simply disapplying the relatively sensible capital requirement rules (which would lead to less leverage and less gearing up) and telling the banks to get on with Business As Usual.

Or as @notayesmanecon puts it:

Borrow at 0.75 per cent (FLS), lend at 5 (Help to Buy), get taxpayer backing. What can go wrong for banks?

All [almost] going swimmingly to plan then, isn't it Mark; well so long as we

don't get mired in endless arguments about what "good-quality" and "affordable" really means ..

On Thursday night the housing minister Mark Prisk said: "We're determined to build a bigger and better private rented sector that gives tenants more choice of good-quality homes. This is part of our wider efforts to get Britain building, which also includes transforming the planning system to support growth and delivering 170,000 new affordable homes by 2015."

Buy-to-let fuels house price boom

Britain's buy-to-let mortgage market has surged to levels not seen since the 2008 financial crash, prompting fears that a prolonged period of cheap money is setting off an unsustainable housing boom.

Lending to landlords topped £5bn in the past three months, a period that preceded the Bank of England's pledge this week to keep interest rates low for the next three years. More than one in 10 mortgages are now being handed to a would-be landlord while first-time buyers are still struggling to get on the housing ladder.

About 40,000 buy-to-let mortgages were advanced in the three months to June, up from 33,000 in the first quarter of the year, as landlords cashed in on cheap mortgage deals and investors sought higher returns than they could get from putting their cash in the bank.

David Whittaker, managing director of Mortgages for Business, said: "Demand for rental property remains red-hot. Landlords are refinancing in their droves to raise enough capital to make further additions to their portfolios."

Housebuilders are also reporting a rush to take advantage of government mortgage subsidies for new homes and a top London estate agent said the value of prestige homes in the capital had risen by 18% – adding £500,000 to the price of a central London home in the past year.

Now is there someone prepared to summarise exactly what is going on in a reasonably short sentence ?

Stephen Lewis, chief economist at Monument Securities, said: "The danger is that, when a flood tide of mortgage finance meets a chronic shortage of housing, the result will be an escalation of house prices."

Thank you Stephen - although, not to be picky you understand, I might have had "cheap, subsidised" in front of "mortgage finance".

"Oh yes, there is that too ..."

The society's chief economist Robert Gardner attributed some of the current gains to "a modest improvement in wider economic conditions and modest gains in employment." 

That would be Rob's opinion as to what lies behind "July's monthly house price increase of 0.8 per cent" which Nationwide, Rob's employer, describes as "robust" and "further evidence of an upturn in the housing market".

Any other factors that might be relevant?

He said Government schemes to stimulate mortgage lending were also having an effect in boosting demand.

And ?

he focused on housing supply as he discussed today's data, warning that "the supply side of the market remains constrained" with building activity "subdued".

"In the first quarter housing completions in England were down 8pc compared to the same period of 2012 and around 40pc below the average number of quarterly completions in 2007," he said.

Yesterday, in This is Money

The mortgage market is being driven by the Bank of England's Funding for Lending scheme, designed to push at least £80bn of cheap cash through lenders - with them able to borrow it at a rate as low as 0.75 per cent.

Low rate mortgages could stick around for some time if the Bank of England has its way, with a heavy hint that base rate won't be going up any time soon - perhaps for as long as three years.

Lenders' funding costs

A number of things influence mortgage rates: the price of funding on the wholesale money markets, the cost of getting funds in from savers and also the amount of capital regulators demand banks hold against their loans.

While the Bank of England base rate has remained at a rock bottom 0.5 per cent, banks and building societies had been paying just under 3 per cent rate to attract new cash from easy access savers.

This dramatically shifted with the arrival of Funding for Lending, dishing out funds at 0.75 per cent took the heat off savings deposits and the money markets and while savers suffered, borrowers are celebrating much lower rates.

Whilst today in TiM

Bank of England warns lenders they face £120bn hole in their finances

In a weighty 414-page document the central bank’s stability watchdog the Prudential Regulation Authority laid bare the costs of meeting a new diktat from Brussels. Twenty seven lenders and one building society, thought to be Nationwide, will have to boost their capital by £120billion to comply with the regulations. 

"Well, transparency is one thing" says B of E spokesperson "but we didn't want to upset hard working, hard pressed families

who have one of these heavily advertised and strongly promoted 'bank with us and we'll reward you for depositing £1000 every month, aren't we just marvellous' type accounts ..."

Banks and building societies have since January knocked nearly £850m off the annual interest paid to savers, the Telegraph can disclose. The cuts coincide with banks making billions of pounds in profit in the first half of this year.

The clawback, buried in the details of a report published on Monday by the Bank of England, affects existing customers who hold easy-access savings accounts.

More than 750 cuts have been made to these accounts in just six months, despite the Bank of England Base Rate remaining unmoved at 0.5pc.

However, deeper analysis of the report exposes banks for hacking back the rates paid to loyal savers as well. These movements are made behind closed doors, never publicised and therefore rarely scrutinised.

The average rate on all easy access accounts is now just 0.97pc, down from 1.14pc in January, the figures show.

This is equal to a miserable £485 a year on each £50,000 of savings, compared with £570 in January - a reduction of around a sixth.

By shaving 0.17 percentage points off the return they pay loyal savers banks have been able to swell their coffers, as the lower outgoings free up cash to use in more profitable parts of the business. This is typically lending arms, where banks are taking advantage of renewed enthusiasm in the property market.

Based on the total amount of money in easy access accounts - £496bn according to the latest Bank of England report - this amounts to £843m in lost annual interest.

Martin lists the 3 important factors ....

"Improved confidence in both the housing market and the economy, [1] combined with a shortage of properties available for sale, appear to be pushing up house prices,"  said Martin Ellis, Halifax's chief economist.

[2] The Halifax said the government's Funding for Lending Scheme (FLS) appeared to be boosting the market by helping to reduce mortgage rates.

Under FLS, banks and building societies are able to borrow money cheaply from the Bank of England, as long as they lend it out to individuals and businesses.

[3] Mr Ellis added: "There are also early indications that the Help to Buy equity loan scheme may be stimulating demand."

The Help to Buy scheme launched in April 2013, and allows borrowers to take an equity loan from the government worth up to 20% of the price of a new house.   That, in turn, enables homebuyers to put down a smaller deposit.

Will the £600,000 Help to Buy ceiling be "far too low" for some?

Well possibly, given it doesn’t kick in until 2014

Ooh! I bet nobody predicted this!

From the BBC:

The number of loans being offered by banks has continued to fall in spite of the Funding for Lending Scheme (FLS). The scheme, which began in August last year, was designed to encourage banks to lend more money, both to individuals and businesses, and boost the economy. But the Bank of England has announced that net lending fell by £2.4bn in the final quarter of last year compared with the previous three months. However, UK banks have taken up nearly £14bn since the scheme started...(1)

Chris Love, of the mortgage broker Mortgage Simplicity, said some of the banks were still trying to increase their reserves, rather than lend more money out. "The data has been skewed somewhat by the activities of a few of the larger banks slamming on the lending brakes to bolster their capital bases," he said.(2)

New figures from the banks themselves confirm that lending to businesses is continuing to fall. The British Bankers Association (BBA), which represents all the main banks, said lending to four million small and medium-sized businesses fell by £382m in the last quarter of 2012.(3)

The Treasury also claimed that the scheme has already had a significant effect. "It has already succeeded in reducing borrowing costs, with some mortgage rates at their lowest for five years," said a spokesperson. "For example, a two-year £100,000 mortgage with a 10% deposit is £1,000 cheaper in the first year than before the scheme started," he continued.(4)

1) Read the small print! Even if banks takes FLS money and reduces its lending slightly, it only has to slightly more than 0.5% interest.

2) Idiot. How can a bank increase its reserves or bolster its capital base by borrowing money, however cheaply? You increase reserves or bolster capital by either making profits or issuing shares.

3) Well duh, banks don't lend much to businesses in the good times, let alone in the bad times...

4) ... but as long as house prices are being propped up a bit, that's the main thing. All's well that ends well.

Economic Myths: Negative interest rates put money into the economy

From the BBC:

Bank of England deputy governor Paul Tucker has said negative interest rates should be considered. A negative interest rate would mean the central bank charges banks to hold their money and could encourage them to lend out more of their funds.

Firstly, how much of the banks' "money" does the Bank of England hold?

As at the balance sheet published on page 54 of their 29 February 2012 annual report it was £218 billion. The £286 billion shown on that balance sheet is the net value of the UK gilts the BoE repurchased under QE, to muddy the waters a bit, you then have to refer to page 5 the Bank of England Asset Purchase Facility Fund Limited's 29 February 2012 Annual Report to reconcile the missing figures. This figure seems to reconcile with the commercial banks' accounts say. Barclays 2012 accounts say that have £86 billion deposited with central banks, Lloyds 2012 accounts say they have £80 billion. I can't be bothered adding up and reconciling the rest.

What is not clear is how much that £218 billion actually belongs to the banks and how much is held by banks on behalf of gilt investors (mainly pension funds and annuity providers) who chose to cash in under QE. By all accounts, this is the bulk of it.

Those gilt investors have to invest in gilts or similar, those are the rules. So the bulk of that money has to stay where it is.

We also know:
- the BoE is currently paying 0.5% interest on those £218 billion deposits (or whatever larger figure it is now).
- the government invented a whizz bang new scheme last year to prop up banks and house prices, called the Funding for Lending Scheme, whereby, basically, commercial banks get up to £80 billion in low-interest loans.
- the interest rate charged on FLS loans, politely referred to as "fee" is only 0.5% per annum (flat fee 0.25% plus variable fee 0.25%) as long as the borrowing bank does its bit for house prices (see last page of this)
- if a commercial bank is naughty and takes the FLS money but just uses it to replace more expensive sources of funding (which is what they have done and why savings interest rates have plummeted), there's no penalty, it's only if a bank is extra naughty and reduces its total lending by 5% that the interest rate charged rises gradually to a savage... 1.75% per annum.

We conclude that there is a temptation there for banks to be naughty. Even if those public spirited bankers nobly resist this temptation, it's 0.5% in either direction. As a result of QE, the BoE is paying commercial banks 0.5% on money they deposit with (i.e. lend to) the BoE. As a result of FLS, the BoE is charging commercial banks 0.5% for money it lends to them.

So if it were true that the banks can merrily withdraw the £218 billion which they have deposited with (lent to) the BoE, there would be no need for the FLS, would there? Or alternatively, we can deduct the £80 billion FLS loans in one direction from the £218 QE deposits in the other direction and call it £138 billion, which we know all belongs to gilt investors, not the banks.

The FLS only makes sense (even in their warped world view) if banks can lend out money and earn more than 0.5% in interest. But if banks could earn more than 0.5%, they would have withdrawn the £218 billion anyway, wouldn't they?
----------------------------------------
Conclusion: the banks do not have any money with the BoE to withdraw and lend to the real economy anyway, whatever the base rate is, positive, zero or negative.

And even if they did, then so what?

Let's imagine that the BoE prints up £218 billion in new notes, dumps them in the safe and rings up the commercial banks and tells them to come and get it, and to the extent that they leave it in the safe, they will be charged 0.5%? The first thing they'd do is go and collect that money and transport it back into their own safes (assuming their physical storage costs are less than 0.5%).

How does that do the economy any good, unless you are in the safe-manufacturing or security business?

Even if the banks lend it out, it will not and cannot go into actual lending for investment into productive assets, because productive assets finance themselves. The income which people can generate in one year from putting productive assets to use is, broadly speaking, the same as the cost/value of those assets. That doesn't mean that the return on capital is 100% per annum, because the bulk of the income goes to the human beings who operate them, but there is plenty of cash there to pay the interest.

If you want to buy a new car but don't have the cash, you don't need a bank. The motor companies are all happy to let you have one under an HP or finance lease, you pay a small deposit, monthly instalments for three years and then you can normally buy the car for fairly cheap at the end, which is worth doing unless you know it has been driven by a complete idiot for the last three years.

The car manufacturer is not actually too fussed whether he sells a million cars a year for £30,000 cash, or whether he sells them on three-year HP deals, in the long run, the number of cars he makes and the amount of cash he collects each year levels out at the same.

Summa summarum, FLS and negative interest rates are all just part of the "They own land, give them money" programme.

QE & FLS: Rubbing our noses in it

From City AM:

Under QE the Bank prints money to buy government debt, to push down interest rates. This is meant to stimulate the economy, but it also drives up inflation. In addition, QE has been criticised as it reduces the value of the annuity retirees can buy with their pension pots, attracting the ire of the older generation.(1)

Weale yesterday defended the policy, arguing that young people have been particularly badly hit by the downturn(2) and so need support from the central bank.(3) In particular he noted that almost 10 per cent of young men have been unemployed for more than six months, compared with just over three per cent for men aged 31 to 64.

As a result he feels hitting the old with QE has been justified because it helps the young.(4)

1) The first paragraph is a fair summary, apart from the bit about QE being intended to "stimulate the economy", there is absolutely no reason to assume that it will achieve anything of the sort, like just about everything else the UK government has been doing for the last five years, it's about propping up banks and house prices.

2) Yes, just about everything the government is doing - propping up rents and house prices, taking away benefits, hiking tuition fees, increasing taxes on labour which destroys jobs and makes it disproportionately harder to get a job in the first place, massive deficit spending etc - is designed to fob off as much of the burden onto the young and future generations, so the end result is hardly surprising.

3) The central bank is part of the government, if it wanted to "support" the young , it would be doing pretty much the opposite of what it is actually doing (see long list in 2).

4) Woah! False choice there! This is not a question of sharing a dwindling cake between the under-40s and the over-65s, what's happening here is that the usual suspects are f-ing over both groups simultaneously, the only winners here are the bankers, insurance companies and landowners.

Just to illustrate the point, also from City AM:

MORTGAGE lending climbed to an 11-month high in October, according to data out yesterday, as the Funding for Lending Scheme (FLS) entered its third full month of activity...

Mark Harris, boss of SPF Private Clients, a mortgage broker, said he expected the mortgage market to ease further and further over the coming year. "This bodes well for next year – as lenders saturate the low loan-to-value (LTV) market with a plethora of rock-bottom rates, they will be forced to turn to the higher LTV bracket," he predicted.

The FLS is out of the same stable as QE, it's about reducing interest rates for the benefit of the already wealthy and the Baby Boomers. Apart from the fact that easy credit and high house prices are what got us into this mess in the first place, the only people to benefit from FLS are people who are selling land (because they can sell them for higher prices) and people with a lot of equity who can double on their mortgages and expand their BTL empires.