Jeremy Warner's Outlook: So that's all right, then. The Government is on the case of beleaguered homeowners

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The Independent Online

You'll be pleased to know that, with repossession orders rocketing and householders struggling to keep up with their mortgage repayments, the Government is now fully on the case.

A wide-ranging package of relief measures was announced yesterday by the Chancellor, Alistair Darling, and the housing minister, Caroline Flint. These include free legal representation at county courts and debt advice training for Citizens Advice Bureau (CAB) staff. Well, that really is a big help. Anything else?

Yes, actually. The Government also intends to strengthen National Housing Advice Service (whatever that may be) to provide a new, comprehensive, debt-advice service, while, after extensive discussions with the Chancellor, the six major UK retail banks have agreed to work closely with CAB and NHAS on a best-practice code to ensure that repossession will only be used as a last port of call. Bravo! Crisis resolved, then.

Hardly, yet, even if this looks like no more than spitting against the wind, there was comforting reassurance from the raven-haired Ms Flint. "It is important to recognise," she insisted, "that we are dealing with an entirely different situation in the market from what was experienced in the early 1990s.

"The fundamentals of the housing market remain strong, with high employment, low interest rates and long-term demand for homes from first-time buyers". So that's all right, then, never mind that, whether they want to buy a home or not, first-time buyers cannot, as things stand, raise a loan to do so.

She's wrong about this, I'm afraid. The housing market is certainly going to get quite a bit worse before it gets better. That said, the banking crisis definitely does seem to be easing. Lots of people have said it over the last two weeks, from the Bank of England to Hank Paulson, the US Treasury Secretary, and Alan Greenspan, former chairman of the Federal Reserve. Everyone seems to agree that the worst is over, with the nadir marked by the near-collapse of Bear Stearns in March. Policy action by central bankers since then is helping to restore confidence in financial markets.

But that doesn't mean that the credit squeeze, and its resulting negative economic consequences, are also over. In this regard, the worst is still very much to come, as we are seeing in rising repossession orders.

The write-offs witnessed among banks to date have been largely confined to holdings of mortgage-backed securities and leveraged loans. As the economy turns sour, we are likely to see the return of more conventional bad debt experience on unsecured lending, small business loans, and directly held mortgages. These shocks are still to come. By undermining the balance sheet strength banks need to lend, the effect will be to perpetuate the present credit famine.

Banking crises normally begin among the borrowers, with rising interest rates and falling demand causing accelerating levels of default. As bad debts climb, banks are forced to scale back on their lending. Good credit risks get punished alongside the bad as banks call in their loans to protect their capital. Yet this particular crisis began not with the borrowers, but with a loss of confidence among the lenders.

With the passage of time, the crisis threatens to transmogrify into a more conventional credit crunch, with borrowers now very much feeling the squeeze and a consequent rise in defaults. The worst of the financial crisis may be over, but its wider consequences are only now starting to be felt.

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