Mortgages Uncovered

The way the banks made up for shortage of saving deposits was by using securitisation vehicles to help them finance their lending. These hold mortgages, only financing them through the short term commercial paper. (For example, last year in July 07, Northern Rock lent £106 billion in mortgages but still hived off £49 billion back into its vehicle Granite which left it completely vulnerable to the complete seizure of the commercial paper market.) The account on the balance of payments went from bad to even worse, however, the pound stayed strong still supported by the inflows of capital from overseas. Exports did badly.

Now, as we all know it’s a very different story. The cash crisis has suddenly pitched British economy into the well overdue rebalancing from its’ consumption to it’s’ investment and exports. Having reduced capital inflows Britain were supporting the pound and decided to cut off the wholesale funds that were financing banks.

Sir James Crosby’s report of the mortgage market was made clear 2 weeks ago, securitisation provided about 2x 3rds of mortgage finance available in 2006 before the cash crisis began. Now that the market has closed, mortgage lenders are dependent on savings and deposits. This is why you see advertisements for cash Isas rather than for 2 year fixed rate mortgage deals in their windows. However, these deposits also have to fund the repayments of the outstanding securitisation issues so there will be very little left over for a new mortgage finance. New mortgage approvals are now down to 1/3rd of last year’s figures and set to fall further.

The mortgage funding problem is just a reflection of a fundamental macroeconomic problem.

Less than a year ago the Federal Reserve and European Central Bank rose to the aid of inter-bank markets, which ended the first dramatic week in the credit crunch. That week the wholesale markets completely froze and paralyzed the banking system. The speed of this seizure was without precedent.

It was rather like an emergency stop in a driving test, without a rehearsal. Unfortunately, there were few drivers wearing seat belts and it only took just over one month for the crunch to see its first victim in the Northern Rock. The markets still remain frozen despite the best efforts of central banks.

It is still proving hard to see any resolution to this crisis. As we saw last week, once again, the large sums of capital the banks seem to be raising through the rights issues etc are being swallowed up by provisions for many bad debts, leaving them now very desperately short of capital. Banks are unwilling to lend to one another and even more increasingly reluctant to lend to anyone else.

So let’s see what effect this is now having on the economy and how this can be mitigated.
Even though the effects of the credit crunch are most obvious in the mortgage/housing markets, these are just one reflection of a rather more fundamental issue – Britain’s economic unbalances and its’ dependence on the variables rate bank borrowing.

Since as early as the start of the millennium, the economy has moved ahead very quickly on the back of strong consumer/government spending/borrowing. At the initial stages, this helped to stave off the effects of a world recession, which in turn hit exports and investment really hard. However, the boom just continued long after the recovery to the world economy, which was supported by a plentiful supply of cheap finance within international markets. Despite the obvious warnings, the government still used the booming tax revenues to finance the current spending rather than saving them for times like this.

Both the Nationwide and Abbey were among the current lenders who made significant cuts to mortgage rates at the beginning of August 2008. Both of the lenders were following their rivals Woolwich, Halifax and Cheltenham & Gloucester amongst many others.

The rate cuts were applied to their hugely popular current deals including 2 year fixed rates, as well as trackers that move in the same line as the Bank of England’s base rate. However, both lenders and mortgage analysts are very quick to dampen the hopes of a wider improvement.

The recent glimmers of competition that as recently returned to the mortgage market are only limited to a handful of lenders who are chasing a select type of lower risk customer, they warn.

Alex Murray a national adviser at network Think Group believes that until we see a return to the wholesale mortgage funding then this turns into the model that was relied on fatally by Northern Rock. With the shortage of mortgages making it hard for borrowers to find cheap finance there will still be a pressure on house prices.

Other brokers also agree; David Hollingworth at London & Country said that some lenders appear to be jockeying again in a hope of expanding their market but only where the very safe lending is concerned.

So the safe lending only means those lucky homeowners that have 25% equity or more in their home which is a group that is also dwindling along with the house prices.

With a full nation now collectively tightening our belts, the Yorkshire Bank has just announced a new summer mortgage deal that is guaranteed to brighten the moods of many homeowners. The Bank is now waiving arrangement fees for its’ new customers who are currently looking to re-mortgage by end of August 2008.

Their offer, which runs for a limited period, applies to a large range of the Bank’s fixed rate mortgages and offset, tracker and flexible mortgages. Plus a similar offer is also available for first time buyers.
Yorkshire Bank, as part of their offer, is also waiving any legal or valuation fees when customers choose to use its own appointed solicitors. Both Rapid Repay and the Flexible Repay customers can now choose their own solicitor and also get £200 towards their legal fees.

Head of Yorkshire Bank’s Retail Division, Gary Lumby stated that they know people were feeling the pinch and they want to help make their mortgages more generally affordable, which is why their fee free switching package was an excellent deal for any mortgage borrower whose current mortgage deal was coming to an end.

Now, homeowners who have to switch to an SVR when their current mortgage term expires with their existing lender can turn to Yorkshire Bank who says they will work with homeowners to look for the best mortgage rate and also waive any arrangement fees.

The Shelter chief executive Adam Sampson condemned ‘merciless mortgage lenders’ in light of a new report based on repossessions and high mortgage arrears from City Watchdog, Financial Services Authority (FSA). This report, drawn from all data on mortgage lending through FSA regulated firms, makes extremely bleak reading for any homeowner. It has now led the authority to demand fairer treatment of their customers in the current market climate.

The Report shows:

• Mortgage possessions have grown significantly towards the end of 2007-early 2008, there with 9,152 new cases in the first 3 months of 2008 which is a rise of over 40% on one year earlier.
• 54K borrowers fell behind on their repayments in the first 3 months of 2008, which brings the total number of all mortgages that are in arrears to 302,000.
• The total number of loans that are in arrears is 15% which is higher than the figure for the first 3 months of 2007, which showed that borrowers who get into difficulties are now finding it even harder than before to catch up with their repayments.

FSA further found the evidence that showed some lenders were completely failing to consider their borrowers circumstances and they were very quick to take court action where they should have only considered repossession as a last resort. The FSA also further found that unfair charges were even being levied further on troubled homeowners.

Over the past year, HSBC have increased their cost of their 2 year fix rate for borrowers with 25% equity in their home by half a % point, from 6.34% during July 2007 to 6.84% in July 2008, according to recent figures from the data firm known as, Defaqto. The increases amount to an extra £62 per month on a £200K loan, or just over £1.5K over the 2 year period.

Lloyds TSB, who owns the Cheltenham & Gloucester, reported a hefty 20& rise in profits from its UK arm taking it to £911 million and did admit it was making more money through charging increasingly higher interest rates.

Over a year ago, C&G were charging an average interest rate of 6.28% on a 2-year fixed rate deal for borrows with a 25% deposit compared to an average 6.61% in July during 2008, or £41 a per month extra.

RBS, meanwhile has increased profits from its UK arm by 9.2% despite unveiling one of the highest losses throughout British corporate history, which was £691 million!

The RBS confirmed a week ago that it was making more money by selling mortgages.

Homeowners are now being urged to shop around much more to make sure they really do get the best deal. Earlier this year, it may have been worth sticking with your existing lender, but with most banks and building societies now heavily competing for people’s business it is now, once again, worth properly scouring the market.

Britannia building society had the best 3 year fixed for a borrower was a 25% deposit at 5.94% and a fee of £598. The monthly repayments on a £200K deal worked out at £1,281.

Brokers are now increasingly looking to the Abbey, owned by Spanish bank, Santander, for the better rates on re-mortgage deals for those people with substantial equity in their home.

Some of Britain’s largest banks have increased their profits through customers by 12% from 3.8 billion to 4.2 billion despite the credit crisis, latest results reveal.

Some of the larger losses arising from the current credit crunch made the headlines only a few weeks ago, however, the small print of some banks’ 6 month reports shows that they are clawing back profits through British consumers due to charging the highest margins on most mortgages for years.

Current borrowers are paying thousands of pounds extra for loans from banks like HBOS, HSBC, Lloyds TSB, Royal Bank of Scotland and Barclays even though the cost of funding loans in the wholesale market is now lower than it was a year ago.

Melanie Bien, a broker. Savills Private Finance stated that she felt lenders had been increasing their margins as much as possible during the credit crunch and there was no question that their mortgages are profitable again. Showing in recent results, it is blatant that the big banks are admitting that they are looking to continue improving their margins by increasing costs to borrowers.

HSBC, snared a 6% share of the British mortgage market in the first half of this year and posted a 28% drop in their global profits in their latest results, yet HSBC’s UK personal banking division was up 85% to £605m.

Northern Rock’s dwindling balance sheet could well look worse than its rivals; however, Northern Rock has not been the only reckless lender in a market convinced that our house prices would only keep rising. Now, all banks are afflicted by a slowing economy and the falling house prices, which are driving up bad arrears and repossessions. On 7th August, Barclays were next to join the queue of banks bearing more bad news, with their pre-tax profits down 33% and predictions of very tough times ahead. One obvious sign of desperation is that the government may now scrap transaction taxes on home sales to breathe new life into the market.

The steep rise in bad debts could not have come at a worse time for British banks. Most of which are only now getting their heads back above water after just raising capital from investors to rebuild their balance sheets which have battered by write-offs on derivatives and exotic bonds backed by iffy American mortgages. There is now a real risk they will be faced with a whole fresh wave of write-offs, this time home grown, and will likely be forced to ask shareholders again for cash and lots of it.

Only a few months ago only the most pessimistic of analysts were musing on the impact on banks of a ‘1990s-style recession’. Now there is gloom in what was a growth industry, and such dire estimates at the moment are common place. Some analysts reckon that losses may even be far higher and consumers are more heavily in debt going into this new recession than they were before the previous one, inflation is lower, which is an indication that nominal house prices may actually fall further.

A surge of more cash calls from banks seem almost certain. Although, whether shareholders will be able or willing to dig deeper a second time is a far less clear picture.

The students of politics and and a great many politicians know the old dictum about lies repeated often enough becoming the truth. Those who are foolish enough to believe that should take another look at the tale of Northern Rock, the troubled mortgage lender who failed last September when it consequently ran out of cash. For nearly a year afterwards Alistair Darling, repeated, mantra like, that this was a sound enough bank only brought down by events from afar, and taxpayers would get back every one of the billions of pounds they lent the organisation. On August 5th Alistair Darling found himself mugged by reality when Northern Rock came back to him, cap in hand.

This time around the bank needed help in shoring up its balance sheet. The government, which is still owed £21 billion by the bank, has agreed to convert £3 billion of the debt along with some £400m in preference shares into ordinary shares. Their urgent need for capital made those who still thought taxpayers would get their money back think twice. So should those who hope that Britain’s banks have already seen the worst of the credit crisis.

Northern Rock needed further government help due to the cushion of capital it held against bad loans deflating alarmingly in the first 6 months of the year, which left it dangerously under capitalised. In that time it posted a net loss of £565.5m and without the extra money there would be similar losses in the second part of the year which would have brought the bank within a hair’s breadth of completely running out of regulatory capital. This much needed injection bought it time. However, there is little hope that it can now stem its losses, many of which come from bad loans in their mortgage book, and the bank really has only itself to blame for it all.

So far for much of the decade it expanded rapidly. All the way up to and beyond, the peak of the housing market last summer where it helped customers pile on debt by lending buyers who couldn’t scrape together a deposit up to 125% of the value of their properties. Loans like these account for around a quarter of Northern Rock’s mortgage book. The bad debts they now have trebled in the past year from 0.7% to 2.1% and are almost double industry average for all mortgages.

However, some of the increase in their arrears is an illusion which is caused by a shrinking mortgage book. In order for them to repay the government its loan (whilst avoiding falling foul of European rules which prohibiting companies who get state aid from competing unfairly), the bank is now encouraging their existing customers to take their business elsewhere. It’s the very accounts that are doing just that. However, those who have missed payments or who fail credit tests at other banks are left behind at Northern Rock.

Following the housing market slump a BBC London investigating team exposed a network of mortgage brokers who were willing to help illegal immigrants get home loans.

Their investigation began after BBC1 London was approached by 3 former trainee mortgage advisers who were since employed by London Professional Academy (LPA) who are based at an office block in Barking, London. The company is owned by San Morre, a Ghanaian business man.

The LPA trainees reported that they were sent to various companies which included, CMS Mortgages, who operated from the LPA’s headquarters in 2007.
When they working at CMS Mortgages these former trainees allege amongst (other things) that they were:

• Informed to falsify passport details of several foreign nationals
• Told to mark down “British” within the nationality boxes of various mortgage application forms if
the client was actually a foreign national.
• Asked chartered accountants to form ghost companies and to request they change the incomes
of low paid, foreign clients to look good enough to make them look like prime borrowers.

An example was a West African, non-skilled worker who was earning £18k who became a self-employed exec. earning £74K. These accounts, (say the trainees’ testimony), were certified by an outside accountant who knew it was all untrue.

Trainee A (name never revealed), told BBC London that they sent a fax to the accountant saying they needed an urgent investment income of 50K so the accountant would then write on his legal paperwork that his client did have an investment of 50K. They certify that people who can’t afford a mortgage were able to support the mortgage payments.

Trainee B (again no name revealed) told BBC London that on the original loan applications they insisted they were always marked as British even if they are not. He explained that when he ever challenged the company about ethics he was made to feel uncomfortable.

Mr Morre claims to BBC1 London (via his solicitors) that he had no control or influence or connection over the handlings of CMS Mortgages. He claims that the LPA business relationship with CMS Mortgages is only of Landlord and tenant.

Cheque payments:

Mr Morre, always maintained there was no business link with him to CMS Mortgages.
BBC London, however, obtained evidence of payments which ran into thousands of pounds from Mr Morre directly to the boss of CMS Mortgages.

Not only this, some of these payments come from the same business account from which Mr Morre paid his own employees – (his LPA trainees).

Payments were found that were also made to the boss of CMS Mortgages from a variety of other companies owned by San Morre.