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BankruptcyNews
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 Posted - 12 July 2007 : 10:48:53
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Brown pins hopes on long-term loans
Prime Minister Gordon Brown plans to create a new regime for "covered bonds" as part of his drive to fund more homes for first-time buyers in Britain.
Gordon Brown pins hoopes on long-term loans to defuse crisis
The new plan for covered bonds was announced as part of Brown's programme to build 3m new homes
Covered bonds are notes backed by mortgages or loans to government institutions. Mr Brown wants to use them to encourage banks and mortgage lenders to finance 20- to 25-year fixed-rate mortgages. At present, borrowers usually fix their rate for between two to three years. Alistair Darling, the Chancellor, is to consult on changes to instruments such as derivatives used by the Debt Management Office to create a market in long-term debt.
The new plan for covered bonds was announced as part of a forthcoming legislative programme designed to build 3m new homes to solve Britain's housing crisis. It also included Bills to create a new housing agency, develop more eco-villages, simplify the planning system and re-work the tax that developers are required to pay on their projects.
Yesterday, the mortgage industry said the changes to covered bonds might fail to reduce the rates lenders were charged on long-term fixed rate deals by any significant amount.
Andy Wiggans, mortgage director at Bradford & Bingley, said: "We welcome the news. It potentially makes funding slightly cheaper, but the view is that a lot of this is already priced into existing fixed-rate mortgages."
Housing costs have more than tripled since Labour took office in 1997, pricing many families out of the market. The Government has attempted to meet the challenge with policies such as share equity.
Share equity, in which the buyer pays 75pc of their home and the Government and lending bank own the rest, was introduced last October, two years after the Government began consulting on it. The target was to bring 20,000 people onto the housing ladder but, so far, only about 700 have taken it up.
What is a covered bond?
Covered bonds are secured on a pool of assets, typically mortgages. That means if the mortgage bank issuing the bonds fails to keep up with its interest payments, investors have recourse to that pool of assets. They are typically rated triple-A because of this extra security, so represent a cheap way of raising debt.
The Government hopes that if mortgage lenders take advantage of this cheap, fixed-rate financing, they will pass it on to their customers in the form of long-term fixed rate home loans.
Source: telegraph.co.uk
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Brown pins hopes on long term loans
