Jeremy Warner: Housing market adjustment cannot so easily be halted

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Outlook: Stephen Hester, chief exec-utive of Royal Bank of Scotland, hopes people might look more kindly on banks now that RBS is planning to give six months breathing space to householders who fall behind with their mortgage payments.

Big deal. One of the reasons RBS can afford to do this is that it was never a particularly big mortgage lender in the first place, with only 7 per cent of the market, and has in any case largely managed to avoid buy-to-let and other distress areas of the mortgage market.

To my knowledge, no other lender has yet formalised the period of grace to as long as six months, but in practice virtually all of them will allow extended payments holidays to struggling householders which in some cases may be even longer.

I'm not quite sure what the six-month pledge amounts to anyway. If a perfectly solvent mortgage holder decides to suspend payments for six months, is that to be allowed? If not, then the undertaking becomes discretionary and therefore no better than any other bank.

The point is that it is not in any bank's interests to rush in and repossess a house at the first sign of trouble. The resulting firesale will only collapse the market further and put yet more mortgage holders into negative equity. Bankers could end up seriously out of pocket.

Yet nor is it in anyone's interests apart from possibly the profligate that mortgagees should be allowed to walk away from their obligations, or that those incapable of servicing the loans they've signed up to should be supported in living beyond their means.

Part of what's gone wrong in the US housing market is that householders who get themselves into difficulty can just hand the keys back and leave the bank to sort out the resulting mess. Any liability is left with the lending bank. Indefinite payments holidays amount to much the same thing, only the mortgage holder gets to carry on living in the same house.

As unemployment rises, ever more mortgage holders will find themselves in arrears. Yet the problem is hardly going to be solved by a six-month stay of execution. Indeed, it might make it even worse, as a backlog of eventual repossessions builds up in the system. A period of necessary adjustment is under way, in the housing market and elsewhere. Politicians still like to think they can buck the market by ordering the system around. They are likely to be cruelly disappointed.