Jeremy Warner: Ninety per cent mortgages courtesy of the taxpayer

Outlook: The debt overhang of the boom has to be removed before a proper recovery can begin
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The Independent Online

So let’s see if I’ve got this right. Gordon Brown, the Prime Minister, wants to abolish 100 per cent mortgages, but he’s also proposing to give Northern Rock, which is publicly owned, the wherewithall to re-enter the mortgage market and start lending at up to 90 per cent loan to value – a marginal difference, you might think, especially in a falling property market.

The two things are self-evidently contradictory. On the one hand, the Government proposes to get rid of the sort of practices that led to the housing bubble (though it is in truth a bit late for that now, and anyway, 100 per cent mortgages were not that common even in the boom), but on the other it wants to start stuffing loans down everyone’s throats once more, particularly if they are first-time buyers.

It doesn’t make any sense, but then much of the public policy response to the banking crisis seems to have been ill thought-through. The Government seems to be making it up as it goes along. Certainly there are mixed messages aplenty.

The decision to allow Northern Rock to turn on the taps and resume lending is a complete about-turn for the Government. The purpose of nationalisation, as I understood it, was to put the Rock, which was said to be a bad bank that epitomised all that was wrong with the state of the UK mortgage market, into run-off so it could pay back the roughly £27bn the UK taxpayer had lent to it after wholesale and retail deposit markets abruptly withdrew their support.

Up until yesterday’s announcement, the publicly owned Rock seemed to be fulfilling its mandate reasonably well. Some £18bn worth of mortgages have already been redeemed, allowing the Rock to repay its masters a corresponding amount in loans. Now the Government says it wants to put the repayment programme into reverse by lending Northern Rock the money to start writing new mortgages again.

That wasn’t the way it was supposed to work, but then amazingly, the Government didn’t seem to anticipate the devastating impact that the removal from the market of one of Britain’s biggest mortgage lenders would have.

One of the unwritten stories about the demise of the Rock was the way other mortgage lenders ganged up to deprive the Rock of the funding it needed to survive. Profitability in the provision of mortgages has rocketed since the Rock, which at its peak was writing one in five of all new mortgages, stopped lending. Ever since, the remaining providers have been royally screwing the mortgage buyer for all they can get. Call it “re-pricing of risk” if you like. I prefer the more basic Anglo- Saxon of “rip off”. When interest rates return to more normal levels, you’ll find you are paying a good two basis points more relative to other rates than you used to.

The other thing the Government failed to realise when nationalising the Rock was that the more it encouraged its better-quality mortgage borrowers to go elsewhere, the more it diluted the overall quality of the book.

Taken to its logical conclusions, the process would have left a toxic rump of only the least creditworthy borrowers. Long before it reached that point, however, clauses within the Rock’s securitisation unit, Granite, would have been triggered, allowing bond holders to claim a right to the better-quality mortgage book. Either way, the Rock would have been left with a worthless rump and all hope of reprivatisation would have been dashed.

In the scale of things, the £14bn of new mortgage lending over two years proposed yesterday is not very much. Certainly, it doesn’t come remotely close to substituting for the gaping hole left in the market by the withdrawal of foreign banks. Even so, a beachhead has been established. The taxpayer is now unambiguously in the business of providing new mortgages.

There’s an argument for all this substitution of private with public debt – of which the Northern Rock announcement is only the latest, smallish example – if it helps slow the pace of the downturn and therefore produces a softer landing than otherwise. Yet do we really want to interfere with what seems a manifestly necessary housing market correction?

What goes around comes around. Hardly anyone offers 90 per cent mortgages any longer, so the Rock will find itself back in its customary place as one of the more extreme lenders in the business. That’s if it can find anyone who wants to borrow, for the problem is as much lack of demand as absence of credit.

One way or another, the debt overhang of the boom has to be removed before a proper recovery can begin. The short, sharp shock approach may have something to commend it over the long, slow agony all this political meddling promises to deliver. What’s more, once the politicians get their hands on credit allocation, there’s no knowing where it will end. New mortgage, anyone? Only if you vote Labour.