Mortgages Uncovered

Yale economist Robert Shiller, who forecast America’s property crash and the bursting of the dotcom bubble, is now warning Britain’s current homeowners that things are set to get as bad here as they are in the USA.

‘A lot of people say that in the UK we haven’t seen so many defaults on mortgages - but we’re just earlier in the cycle. These housing cycles go for a long time. Real estate markets are very different from liquid financial markets, in that they have a lot of momentum, and they continue in the same direction for a long time.’ He pointed out that during the last housing boom and bust, in the 1980s and early 1990s, prices in London more than doubled, in inflation-adjusted terms, ‘and then they came almost all the way back down again. That’s certainly a possibility now, and that would be huge. Think of all the balance-sheet problems that would cause, for banks and for households.’ Said Robert Shiller.
He went on to say that “Northern Rock was the first bank run since the 1860s. Once that happens, and you have these photographs of people lining up outside banks, there’s a shock to confidence, and a loss of trust in financial institutions,’

Robert Shiller was last week invited to Downing Street to share his critical analysis of the situation with Gordon Brown and Alistair Darling. He calls for better public financial education and newer more standardized mortgage products which can be adjusted to suit the changes that can often occur in borrowers’ personal circumstances.

Defying government calls to provide cheaper mortgages Northern Rock, the government owned building society increased rates on its most competitive home loans after only reducing them ten days previously.

HSBC this week, withdrew a key popular mortgage product which was a tracker priced 0.99% above the BofE base rate for the full term of the loan – it had been reported that application volumes were three to four times higher than normal levels.

Raising the cost of its new fixed-rate mortgages Northern Rock have added interest by up to 0.3% to some of its products. The lowest rate it offers, is only fixed for a year and was also increased from 3.99% - 4.19%.

There were many mortgage brokers who believed that the bank had originally priced its new fixed rates too competitively which had resulted in a huge flood of new business.

“I suspect the reason is that they came in so cheaply,” said Melanie Bien at Savills Private Finance, the mortgage broker. “Northern Rock would have had a certain amount of money available at this low rate, which has now been used up.”

Northern Rock said it wanted to continue lending to new borrowers but at more modest levels.

“We will adjust our competitive standing at different times to attract or moderate business flows,”

it said.
Still HSBC and Northern Rock had offered the market some of the most competitive rates with. Woolwich still giving a fixed rate of 3.99% for 12 months, however, most lenders’ rates normally start between 4.3% - 4.5%.

Falling house prices have started slowing said Nationwide last week although experts have already predicted that they have much further to fall yet. Nationwide said prices fell 0.4% in November and 13.9% over the last year. However, these prices were a little better than originally expected as analysts had otherwise forecast a 1.6% monthly drop with an annual predicted fall of 14.9%.

Economists still believe that prices have to bottom out in the market.

“With the economy set for a deep recession …we expect the sharper downward trend in house prices of recent months to reassert itself,”

said Seema Shah at consultants Capital.
More cuts to interest rates are set to boost the flagging housing market because not all banks are passing them on to customers in full. The Bof E’s committee of monetary policy cut 1.5% off rates in November to leave rates standing at 3%, analysts now are forecasting it will go on to cut at least another 0.5% after next week’s meetings.

Home Builders Federation spokesman, Steve Turner, said it was vital to restore the economy’s mortgage lending to aid recovery in the market.

“For this reason we believe it is imperative that the government acts on [Sir James] Crosby’s recommendations immediately and does not wait until next spring, he said, referring to Crosby’s plan that the government should provide £100bn of guarantees to the mortgage-backed securities that were used to fuel home loans before the credit crunch. Turner added that Brown also restated the commitment that Alistair Darling, the chancellor, made when announcing the banks’ refinancing package in September that he would use government influence on the banks to restore some sensible levels of lending. “

Northern Rock the nationalized bank is set to increase its interest on its 2, 3 and 5 year fixed-rate mortgages by between 0.2% and 0.3%.

Under new banking rules, Northern Rock cannot issue over 2.5% of any of the UK’s new mortgages will not be appearing in any best-buy tables for a “prolonged period of time”.

The increases which took place today Northern Rock had been offering a2 year fixed rate at 4.99% with a 25% deposit and an arrangement fee of £995 which was the 2nd best deal on the market. The rate was increased today to 5.19%.

Several lenders quickly cut their standard variable rate following this month’s base rate cut.
There are now fifty eight lenders out of ninety six who have so far announced that they are going to reduce their SVRs, however, only twenty one of them have passed on the full 1.5%.

Only last week HSBC announced it would cut SVRs by 0.81%, giving a newer rate of 5.44% as of 5th December, this would be the first cut as they failed to pass any of the October base rate cut.

The Barclays’ Bank mortgage arm, Woolwich announced it was going to be cutting its rates on fixed-rate deals by up to 0.7% which translates to 4.39% for a person with holds a 2 year fixed rate deal with a £995 arrangement fee.

The new lifetime tracker from Barclays-Woolwich sits at 1.99% above base rate and starts at 4.99% for any customer who borrows 60% of the value of the property with a fee of £995.

The government turned its focus to helping struggling homeowners who were struggling with repossession due to missed mortgage payments due to loss of jobs.

In its pre-budget report yesterday the government announced that from April 2009 it would cover the interest due on mortgages of £200k and over for borrowers who have been out of work for 13 weeks or more.

Previously there was only support for homeowners with mortgages of £100K or less.
Despite the recent interest rate falls the maximum rate of interest which the government is committing to pay will be 6%.

The government is asking banks to be less harsh with borrowers who have missed mortgage payments and stated that home repossession should be the last resort in that banks should do everything to help people struggling with mortgage payments.

The new government measures are completely supported by The Council of Mortgage Lenders although there was a general feeling from CML that more would need to be done to really help the growing number of homeowners who have already lost their jobs or could face redundancy in the next two years.

“Everything announced today is helpful, if modest,” said Michael Coogan, director general of the CML.
Melanie Bien who is Director of Savills Private Finance was one person who claimed that the government initiatives would serve to help the more vulnerable borrowers but would not help to stimulate a slowing housing market.

“These are extremely difficult times for the housing and mortgage markets, the two main problems facing the chancellor are to urgently help those families in danger of having their homes repossessed and to reinvigorate the housing market.”

It would seem that some of the more wealthy investors are now seeking to profit from the headache that is the buy-to-let housing market as recent figures revealed by CML showed that arrears amongst landlords had sharply risen during the past 3 months.

“The payment profile of buy-to-let lending has worsened more rapidly than the market as a whole. Reasons include falling rents and an over-supply of rental property in some areas,” it said. Investors are seeking to profit from distressed landlords by picking up properties at rock-bottom prices. Here we look at some ways to get back into the market.

Launched at the start of 2008 by Managing Partners Limited (MPL), The British Opportunities Fund is also backed by Halifax Bank of Scotland and has already paid between £89K- £100K for each property. Properties that two years ago were selling for £180K - £205K.

After stating it had already returned over 6% growth since the beginning of the year, the fund has now bought fifteen of forty eight properties in Fort Cumberland Street and at this moment in time still has pending offers on another ten homes on the street.

Management forecast a 10% minimum rental yield on each property; it has also now funded “non-structural refurbishments” installing a caretaker to maintain the street so it may charge high rental costs. Minimum investment is set at £50K - £2.5K if funded through a self invested pension.
Jeremy Leach, managing director of MPL, said:

“The fund has been able to purchase these properties from landlords who have overstretched themselves at prices that are as much as 40% below market value.”

It is strongly felt that the chancellor needs to do much more in helping the flagging Scottish housing market along with its homeowners, particularly those who have lost their jobs says the Scottish Government.

Nicola Sturgeon, the Deputy First Minister has sent written communication to Alistair Darling slightly ahead of his much anticipated pre-budget report.

Nicola Sturgeon has requested major investment for more affordable housing and more tax breaks in order to aid Scottish landlords in maintaining their current stock. There has also been a request for a much quicker introduction in the planned improvements for developing a scheme which will directly aid struggling homeowners.

Under the current Income Support mortgage (ISMI) scheme, UK Government will help to pay the interest on any mortgages which fall under £100K following the initial 9 months of mortgage arrears.
Plans to shorten this time period have already been discussed along with increasing aid to all mortgages up to £175K, however, the Scottish Government are urging that they want these changes implemented much sooner, by at least, January 2009.

Nicola Sturgeon has requested a permanent VAT reduction of 5% be passed to Registered Social Landlords to aid them in their repairing, maintaining and housing stock in order to aid the flagging construction industry.

Ms Sturgeon said:

“Next week, Alistair Darling has a gilt-edged opportunity to do the right thing by lending a helping hand to boost Scotland’s housing industry. There has never been a more opportune time for the chancellor to inject significant funding for much needed affordable housing across Scotland. At a time when so many jobs are being lost, he should also provide a boost for Scotland’s construction sector”.

Home repossessions have risen by 12% between the months of July and September and yet more people are completely struggling with their mortgage payments at the moment claim the Council of Mortgage Lenders last week.

CML figures showed that 11,300 homes were repossessed during the third quarter of 2008 and market analysts went on to warn that there is much worse to come in the forthcoming 12 months.

CML has predicted another 45,000 home repossessions throughout the UK next year which will be the highest repossession figures since 1995. CML’s quarterly report also revealed 168,000 households were already in arrears from the end of September which is a clear 8% higher than the 155K of arrears at the end of June 2008.

CML also said, “in a worsening economy”, the original predicted figure of 170,000 households falling into mortgage arrears at the end of 2008 is likely to be far higher than this.

The economic consultancy known as IHS Global Insight has predicted home repossessions would continue to rise “substantially further” before 2008 ends and this will be down to the rising unemployment figures, higher levels of debt and tighter credit conditions which also means that many people are facing a negative equity situation in their properties.

The Chief UK economist from IHS Global Insight recently said “The many people who had to stretch themselves to the absolute limit to get into the housing market in recent years are particularly vulnerable.”

Michael Coogan, director general of CML, said lenders would “look at every possible way of minimising repossessions”, which is why the forecast number of repossessions remained unchanged.

It is starting to seem pretty clear that the UK housing market has really dropped over a cliff.

The BofE’s 1.5% rate cut has helped to reduce the monthly costs of current homeowners, but the British housing problem is largely due to the rather reckless policies of some of its’ mortgage lenders during the past ten years. This first happened during late 1980s boom and has suddenly happened again, driven through competition for market share and demutualization.

It would appear that mortgage lenders are completely unable to learn from history, there are many who now feel that the government now needs to start imposing rules on lending to stop this from ever happening again.

Up until early 1980 mutual building societies were lending more conservatively and it was largely based on retail savings. However, deregulation within 80s further allowed them access to more wholesale funds, allowing other banks to enter into the quickly competitive housing / mortgage market. This resulted in lenders competing very fiercely for their market share which meant that mortgages were easier to obtain, the value of loan to income rose and it was commonplace to see 95% mortgages or even more on house prices as expectation in the market at that time was that house prices were rapidly rising which meant that lenders were protected.

The recent government bail-out should stabilize the banking system somewhat; however, it is strongly felt that in the long run the government should set a limit on the maximum of wholesale mortgage funding. Government should further insist that lenders in the future should not offer more than 90% of the property value; they should also halt interest only mortgages and if you cannot afford to pay off principal then it should not be allowed for you to take a mortgage.

Whilst restrictions such as these will mean that mortgages are more difficult to get it is felt that it is necessary due to the disastrous consequences of the past.

The UK’s leading mortgage lenders are still raising their interest rates for any new customers and therefore continuing to keep the interest rate cuts under their own roofs.

Office for National Statistics has stated that inflation which is measured by consumer prices index had now fallen to 4.5% during October which was down 5.2% on September. The inflation drop has been higher than economists had originally anticipated which is largely down to a slowdown in the price of food and dropping fuel prices.

Homeowners with current tracker mortgages will enjoy large cuts in monthly payments with the recent interest rate cuts; however, consumers who are looking for new tracker mortgage deals are set to pay bigger margins which are above the BofE rate.

Libor – which is the lending and borrowing rate between banks for funding mortgages recently fell to 5.75% at the end of September to nearly 4% this week.
Even in spite of all these rate cuts lenders are still increasing the interest rate margins on their new mortgages.

“The margins are very wide – much wider than they were a month ago,” said David Hollingworth, of London & Country Mortgages, the independent broker. “But for many consumers, a bigger problem will be that most of the products available at the moment are only for those with a low loan to value [LTV]. A rising number of borrowers may be forced to revert to their bank’s standard variable rate (SVR). This may not be as unappealing as it once was, as many banks have slashed their SVRs by 1.5 percentage points since the start of the month, after the Chancellor put pressure on them to pass on the full Bank rate cut.”
Sue Anderson, of the Council of Mortgage Lenders, defended the banks’ decision to increase the margin on their trackers. “It reflects the mix of business levels that lenders now have,” she said. “A lot of lenders fully cut their SVRs by 1.5 percentage points, even though their own funding cost would not have been cut by that amount.”