BOE Foolishly Follows Fed Footsteps

The UK Council of Mortgage Lenders pleads Bank of England must act on mortgage market.

The Bank of England came under further pressure to act quickly on the mortgage crisis today, as the Council of Mortgage Lenders reported that mortgage lending tumbled 17pc in March.

The trade body for lenders warned of "rapidly worsening market conditions" as banks and building societies await government intervention to ease the reluctance between banks to lend money in the wake of the credit crunch.

Michael Coogan, director general of the CML, said: "Early action is needed if we are to be able to maintain a market in which UK borrowers continue to be able to access mortgage funds at reasonable prices."

My Comment: Where was the Council of Mortgage Clowns hiding when the bubble was being created? And who gets to determine "reasonable prices"? Perhaps mortgage rates were too reasonable, too long. What needs to happen is for housing prices to crash. The sooner home prices become affordable the better off everyone will be.

Mortgages are becoming more expensive for cash strapped consumers despite the Bank of England cutting interest rates by a quarter of a percentage point to 5pc earlier this month.

The gap between the BoE's base rate and Libor - the short-term rate at which banks lend to each other - has widened. In order to cover their costs, a slew of mortgage lenders have hiked their mortgage rates and pulled their 'best buy' deals from the market in a bid to reduce business volumes.

Deals are drying up and househunters face having to bring a larger deposit to the table.

Meanwhile, analysts at Citigroup note that activity in the housing market has "dropped alarmingly in recent weeks", leading them to cut forecasts in the housebuilders sector.

My Comment: There should be nothing alarming about the drop at all. Rather what was alarming was how big the bubbles got in the UK, Spain, Ireland, Canada, Australia, China, etc., etc., etc. People have this alarming thing ass backwards.

Mark Stockdale of UBS said: "Short of significant intervention by the Bank of England, we believe that 2008 is going to see significantly depressed new housing starts and declining selling prices."

My Comment: Regardless of what the H the BOE does, 2008 is likely to see "significantly depressed new housing starts and declining selling prices." How hard is it to look at the Fed slashing rates from 5.25% to 2.25% only to see housing prices in the US continue to waterfall, and for walk aways and foreclosures to soar.

Property prices saw their biggest fall since 1992 last month, according to Halifax, registering a 2.5pc drop between February and March.

The International Monetary Fund has already warned that UK house prices could fall by as much as 10pc over the next year. Adding to the gloom, the Royal Institution of Chartered Surveyors announced earlier this week that nearly four in five surveyors recorded a fall in values in March - the highest since records began 30 years ago.

My Comment: A badly needed correction is underway. It will likely last for years. Fear should not be that home prices crash. The fear should be the BOE does something stupid to try and prevent a crash.

$100b bank rescue package

The BOE is following in the Fed's footsteps with a misguided $100b bank rescue package.

The Bank of England is planning to provide around $100 billion of support to British banks and lending institutions. The Bank of England plans to fill the breach, and next week it will announce a proposal to pump new money into the banking system for up to three years.

It will offer to swap government bonds with a maturity of up to a year for the bank's unsellable mortgage assets. The cash-strapped banks will breathe a sigh of relief. It's what they've been requesting for months.

If the US is any guide, creative nonsense at the BOE is just beginning. However, that sigh of relief everyone hears will quickly become a sigh of grief when it fails to produce the desired results.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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