Chancellor to urge mortgage lenders to help 'struggling' homeowners

Chancellor Alistair Darling will today meet mortgage lenders to discuss ways to help struggling homeowners survive the credit crunch.

The Bank of England yesterday unveiled a £50 billion scheme to tackle the credit crunch by allowing banks and building societies to swap their riskier mortgage-backed assets for safer government bonds in a bid to kick-start crippled money markets.

Mr Darling told MPs he will meet the Council of Mortgage Lenders today to discuss the new scheme.

He added: "In the light of everything we are doing with them, I want to discuss with them how they can pass on the benefits of falling interest rates as well as wider Government support to mortgage holders."

Bank of England Governor Mervyn King said the new arrangement was necessary to boost liquidity, restore confidence in the banking system and "protect the rest of the economy" from the credit freeze.

Mortgage lending has fallen to historic lows since the start of the crisis last summer, with falling houses prices threatening a wider impact on the UK economy.

The Bank of England has slashed interest by 0.75% in the past five months, but many lenders have actually upped the cost of borrowing this year to repair balance sheets holed by losses on mortgage-backed investments following problems in the US housing market.

The asset-swapping scheme was criticised in some quarters as a bail-out exposing taxpayers to losses in the event of another Northern Rock-style banking collapse.

Liberal Democrat Treasury spokesman Vince Cable called for banks who have suffered losses to raise their own capital through rights issues - following the example of the Royal Bank of Scotland, which is expected to ask shareholders for billions this week.

Mr Cable said: "If banks are going to receive support from the Government, it must be conditional. Banks and their shareholders must bear the brunt of previous bad lending, not taxpayers."

Taxpayers' Alliance analyst Matthew Sinclair described the swap mechanism as "dubious".

He said: "There is a double hazard involved - not only are we sending the message that banks can rely on the taxpayer to bail them out, but we are effectively buying questionable mortgages with taxpayers' money.

"The Government has already exposed us to more than enough risk in Northern Rock, they should be extremely cautious about further exposing the taxpayer to the risks of a housing market in trouble."

Shadow Chancellor George Osborne added: "We have seen the share prices of the banks go up since word of this scheme was leaked. What we haven't seen is the mortgage costs come down.

"The last time he called for the banks to pass through a rate cut they all ignored him completely, even the one he owns."

Mr King said banks would pay to take advantage of the scheme and were going through a period of "painful adjustment" after excessive lending in the past. The Governor is prepared to extend the scale of the scheme if lenders call for it.

The Bank will also demand collateral worth much more than the Treasury bonds issued to protect taxpayers from a potential fall in value of the mortgage-backed bonds taken as security.

The Bank has suggested that £100 of collateral would secure bonds worth £70 to £90, with a fee based on inter-bank lending rates also charged.

"It's not true that (the banks) are being bailed out," Mr King said. "The aim of the scheme is to increase the liquidity of the banking system as a whole."

He warned banks taking advantage of the scheme against returning to the sort of riskier lending seen during the recent housing boom.

The chief executive of Barclays, which suffered a £1.6 billion hit last year from the credit crunch, welcomed the initiative.

John Varley said: "We are very supportive of this development. It is both innovative and substantive.

"Barclays is fully committed to making the new facility a success and will be an active participant."

Sue Anderson, spokeswoman for the Council of Mortgage Lenders, told GMTV it hoped to have a "very productive" discussion with Mr Darling.

"We just want the Government to do its bit and we want to do our bit. We want to get the mortgage market back to a more normal situation," she told GMTV.

"We do hope getting more money into the system, as the Bank announced yesterday, will free up the system so mortgage rates can become cheaper."

She denied irresponsible lending was the reason for the current problems, saying: "People who get into difficulties are there because something else has happened in their life - they have lost their job, their partner has left them."