May 19, 2013 / 1:04 AM / 5 years ago

BoE governor King warns of risks in mortgage scheme

LONDON (Reuters) - A flagship British government scheme to boost mortgage lending must not become permanent like in the United States, outgoing Bank Governor Mervyn King said on Saturday.

King’s warning follows criticism that the plan will encourage the kind of risky lending that precipitated the 2008 financial crisis.

“We do not want what the United States have, which is a government-guaranteed mortgage market, and they are desperately trying to find a way out of that position,” King told Sky news.

“So, we mustn’t let this scheme turn into a permanent scheme. Now when is the right time to terminate it will depend on economic conditions at the time,” he added.

Chancellor George Osborne announced the scheme in March as a way of helping people on the property ladder at a time when banks are demanding big down payments.

It allows some buyers to get a mortgage with a deposit of just 5 percent via up to 130 billion pounds ($197 billion) of government guarantees on high-risk mortgages for three years.

In unusually outspoken comments a former Bank policymaker earlier this month criticised the plan as a “short-term political fix”.

The finance ministry has defended the plan as a good way to leverage the government’s relatively low borrowing costs to help Britons buy a home, thereby stimulating the construction sector and helping to revive the flagging economy.

King said the economy was recovering, but only modestly.

“We certainly can’t be satisfied with it ... We will need to do more to use up the spare capacity, and to get back to a healthy, growing economy. But we are in a recovery period now,” he said.

King has voted in favour of resuming the BoE’s bond buying in recent months but a majority of the bank’s policymakers has voted against a resumption.

Reporting by Mohammed Abbas; Editing by Eric Walsh

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