The monthly lending figures from the Bank of England were released today, and predictably the newspapers have reacted with screaming headlines saying that Mortgage lending plunges by 60% and lamenting how this would affect the economy.
Delving into the figures shows a more interesting picture, however. It's net lending that had plunged (i.e. new lending less repayments and redemptions). Mortgages issued for purchases of houses were slightly higher in value compared to December. Remortgages are down - but that's because of a lot of people coming off their fixed-rate onto the standard variable rate are deciding to stay there instead of remortgaging for another fix (rational as the arrangement fees on new fixed rate mortgages have soared). As a result, gross lending is down by £875 million.
But net lending is down by £1104 million. Which suggests that in January households made a concerted effort to use the money released by falling interest rates to pay down their existing mortgages. This is actually a good thing. It puts households in a stronger position, and as explained in my previous post, repayments of capital help banks and building societies who wish to reduce their wholesale funding.
It's coping with the roll-over of wholesale debt that continues to pose a problem for the banks. According to UBS, HSBC has $97.3bn in securities maturing in 2009/10, Barclays has $69.8bn, and HBOS has $57.6bn in securities maturing in 2009/10. They can either try to refinance these over by issuing new securities - but every bank in the world will be trying this, and competing with governments also seeking to borrow from the markets at the same time. They can try for a rights issue to raise money from shareholders (as HSBC is doing). They can simply get more capital from governments through bailout schemes (but will make them even more "nationalised" than they are), or they can rely on households repaying debt at an accelerated rate.
The commercial sector is not repaying debt (most of the horror story of the HBoS losses concerns their commercial lending unit). Shareholders are reluctant to inject more money into banks - see the sell off of HSBC's shares today following the reports of the losses they made in the US and Asia and the announcement of their rights issue. Governments can inject more money, but there is a reluctance to nationalise, and the more money injected the closer outright nationalisation gets. That leaves households, the one sector that has had their disposable income increase, thanks to falling interest rates, falling oil and falling prices. As I said before, if I was in charge of these banks, I'd be writing to every mortgagee on a tracker or standard variable mortgage, pointing out the benefits of making extra capital repayments. The banks are not making much profit on these mortgages anyway, so they might as well encourage people to pay the money back.