Reality Of Loans Climate Leaves No Room For Pretence

The markets were yesterday looking to Ben Bernanke, chairman of the Federal Reserve, to confirm the growing hope that the worst of the credit crunch may be over. He did not oblige. The best he could come up with was that measures taken by central banks in recent weeks had stabilised the situation “somewhat”. He even came close to admitting that the US may already be in recession as problems in the financial markets “weighed on real economic activity”. In the UK, that weight is becoming more apparent. Every day more than 3,800 people are coming off cheap fixed-rate mortgage deals and discovering the hard way that the credit crunch is not just an abstract phrase in the financial pages. From paying an easy 4 or 5 per cent, they face being stranded and paying the lender’s standard variable rate of 6 or 7 per cent unless they can find a new source of cheap debt. The banks are having to navigate in a strange new world - a world where wholesale funding is neither plentiful nor cheap, a world where brownie points are earned not for winning mortgage customers but for turning them away, a world where savers have to be wooed and generously rewarded. Some lenders are dealing with these conditions better than others. Pulling mortgage products abruptly or tightening lending criteria does not go down well with customers trying to negotiate house purchases. Mortgage brokers, which still dominate the industry, particularly hate the chopping and changing. The withdrawal has become an unseemly scramble with banks leapfrogging each other to worsen terms so as to avoid being anywhere near the most competitive. The banks risk being accused of profiteering by racking up their interest rates and of gouging vulnerable borrowers with nowhere else to turn. But interest rates have until recently been raised only for new customers. The cost of funding these new mortgages has rocketed, whether the bank relies on depositors, who can now command 6 per cent or more, or the wholesale markets, where Libor is still three-quarters of a percentage point above base rate. The alternative approach to mortgage rationing is just to say “No”. HSBC’s direct banking offshoot, First Direct, has adopted this line, simply rejecting any applicant who is not already a customer. The decision was forced on it by a wave of outside loan applications which was running at five times normal levels. First Direct’s systems couldn’t cope and it was taking as long as ten weeks to get a quotation letter. Of course, this sends potential customers elsewhere, driving up rates and fuelling the threatened cycle of lower consumer spending and lower house prices. Nor is there any sign of easing of the pressure on the corporate sector, where the credit crunch is starting to bite some companies hard. Yesterday Imperial Energy, a UK oil company focused on Russia, said it had been forced to scrap plans for a debt financing because the rates being demanded were no longer attractive. Instead it announced a $600 million rights issue, driving its shares down by 25 per cent at one stage. In the City, hopes that conditions will ease soon are fading fast and banks are wielding the knife. Citigroup yesterday cut more than half the 25 staff in its leveraged finance business, which handles lending to companies with high debt. Deutsche Bank and JPMorgan have axed about 40 per cent of their teams. Despite all this, the stock market has been saying that the worst may indeed be over. It certainly doesn’t feel right to call the bottom yet. But then again it never does.

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