Responding to the Mortgage Crisis

With repossessions at their highest level since the housing market crash of 1991, and more than 30,000 people set to lose their homes on current trends before next April, a new report from the Centre for Economic & Social Inclusion argues that radical measures should now be taken to help hard pushed borrowers reduce mortgage payments and to improve court protection against repossession.

The report highlights the fact that the cost of mortgage repayments, relative to household income, has been steadily increasing since 2004. This has now been combined with a ‘de-coupling’ of mortgage rates from bank base rates as a result of the global financial crisis – causing the cost of borrowing to rise rapidly, a surge in arrears, and a rush to repossession by lenders who have also seen house prices fall dramatically.

Pointing out the more pro-active approaches now being taken by regulators in the U.S where ‘loan modification’ programmes are now being introduced to ensure no-one pays more than 34% of their income on mortgage repayments, Damon Gibbons, Head of Policy and Partnership at Inclusion, commented:

“Restoring mortgage affordability is critical to reducing the number of repossessions. There is a strong case for government to insist that banks introduce a mortgage restructuring scheme in the U.K in order to achieve this. The new UK Financial Investment Company should ensure it uses the £37 billion of taxpayer investment in Britain’s banks as a lever to achieve this.”

The full report is available here :

http://www.debt-on-our-doorstep.com/files/Responding%20to%20the%20Mortgage%20Crisis.pdf

Northern Rock Nationalised

The decision to nationalise Northern Rock represents the ultimate failure of the private sector to sort out its own problems arising from the credit crunch. Heavily reliant upon public investment in the entire banking sector (and increasingly upon the use of sovereign funds from overseas governments) the financial sector is no longer capable of raising funds to rescue those banks in the biggest trouble.

This is bad news. Not least because it also means that many other projects reliant upon raising large amounts of capital will also find it more difficult to proceed. Look around any UK city, and you will find a skyline of cranes putting up retail developments, swanky city living apartments, theatres and cinemas. But already many of these projects are in jeopardy. As last weekend's Guardian reported from Manchester, many of those city apartments have already come down sharply in value. There is every likelihood that new developments will stand empty for some considerable time as consumers lack the confidence to buy and mortgages are harder to find.

Equally, many commercial developments are likely to be stopped. The commercial property market started to squeal loudly in pain last month with many share prices tumbling. It's hard to see the financial sector wanting to invest in new developments for commercial property even if it had the ability to get it's hands on the levels of cash that this would require. But the reality is, cash and liquidity is now of vital importance to the banks themselves so less likely to be available for investment. That supply side crunch feeds through as both inflationary pressure (demand remains high) and as a threat to growth (by removing the funds for investment), which poses such problems for monetary policy in the UK.

So no surprise that the Northern Rock fiasco has resulted in nationalisation. But what next? Northern Rock has been actively repossessing customers in arrears in recent months. Will the Government want to take responsibility for evicting families from their homes, or will they now take an active role in leading mortgage lenders to adopt better ways of dealing with debt. Today's call by union leaders to preserve jobs at Northern Rock needs supporting, but further demands to review debt management, arrears and repossession policies also need to be urgently raised with new boss Ron Sandler.

Bradford & Bingley Reveals Trouble Ahead

Bradford and Bingley yesterday revealed a halving of profits as a result of failed investments in the U.S sub-prime housing market, and a surge in mortgage arrears with its UK borrowers to 40%. The declaration has caused some commentators to accuse B&B's management of a lack of 'credibility', and caused a meltdown in the value of B&B's shares (which lost a quarter of their value in a single day), and casts doubt on claims that the UK's lenders have been more responsible than their US counterparts.

The backdrop to the announcement from B&B is a combination of rising respossessions and falling property values, with the ratio of secured debt repayments to income at its highest level since the housing market crash in the early 1990's. In addition, the credit crunch is now starting to have an impact on businesses and employment. Although yesterday's figures revealed that unemployment continues to fall, business optimism is on the floor with an increasing number of employers forecasting that they will be laying workers off at some point in the next 12 months.

Despite these warning signs, the UK has not started to consider the types of support packages that will be required to protect consumers from the impact of a sharp downturn in the housing market.

In the US, steps have now been taken by lenders to restrict mortgage foreclosure actions and commitments given to take additional steps to help borrowers in difficulty as a means of preventing a flood of respossessed properties from further depressing house prices. As yet, no such discussion has been initiated by lenders in the UK. Neither has Government considered how it can improve assistance to borrowers that fall into arrears - for example by increasing the level of mortgage assistance available to the newly unemployed.

In the light of the Bradford and Bingley announcement, Debt on our Doorstep calls for a tri-partite forum involving lenders, Government, and consumer agencies to be convened as a matter of urgency to develop a package of support measures and improved protocols for dealing with consumers in arrears and to make recommendations to improve responsibility in lending.

Mortgage Repossessions Set to Soar - Guardian

From Guardian Unlimited 29th October 2007

The number of repossessed homes looks set to soar next year to levels not seen since the 1990s house price crash, it was claimed today.

At the same time, house prices will edge ahead by just 1% in 2008 and property sales will fall by 15%, according to the Council of Mortgage Lenders (CML).

The group expects the number of repossessions to rise by 50% during the year, rising from 30,000 this year to 45,000 in 2008.It said this would be the highest level of repossessions seen since the 1990s, although it added the number of mortgages had increased by 1.5m since then, and the level of repossessions still represented just 0.38% of all home loans.

The number of people who are in arrears of at least three months is also set to increase, with 170,000 people expected to have problems keeping up with their mortgage repayments next year, compared with an estimated 145,000 this year.

The CML said this was because the five interest rate rises since summer 2006 were beginning to take their toll. This would be especially true for the 1.4 million people whose fixed rate deals, taken out when interest rates were much lower, run out next year.

But it added that additional pressure would be put on households as a result of a tightening in lending criteria sparked by the global credit crunch. It said remortgaging options available to some borrowers, such as those borrowing high income multiples, people with high loan-to-value ratios and those with adverse credit histories, would also reduce.

Crunch to intensify

The group said the credit crunch would exacerbate trends already emerging in the market. It predicts house price growth will fall from 7% this year to just 1% next year, while property sales will drop from 1.17m to just over 1m. At the same time, total mortgage advances will edge lower to £340bn, compared with £360bn this year, although the amount lent will remain above 2005 levels.

Net lending, which strips out redemptions and repayments, will also decrease, seeing a drop to £90bn from £105bn. But the CML added that it did expect interest rates to fall, and has pencilled in a 0.25% cut before the end of this year, with rates reducing by a further 0.5% to 5% by the end of next year.

CML director general, Michael Coogan, said: "The housing and mortgage markets are facing their most challenging period since Labour came to power a decade ago.

"Luckily, the credit crunch occurred at a time when the UK economy was robust, but even so the effects on the financial sector are significant, and the mortgage market is not immune from them.

"We now expect a slower mortgage market next year, although by no means a stagnant one," he added.

The group said the impact of the credit crunch made forecasting an even more uncertain process than usual, and as a result it was only issuing forecasts until the end of 2008, and would not issue its predictions for 2009 until the first quarter of next year.

Irresponsible Lending Hits Home - Northern Rock is only the start

Irresponsible Lending Hits Home: Why Northern Rock is only the start

Debt on our Doorstep and the European Coalition for Responsible Credit today issued a stark warning that the Northern Rock crisis, considered by many commentators an after shock of the US sub-prime lending disaster, is in fact a precursor of wider problems that will be witnessed in the UK over the next 12 months.

In a joint statement, Damon Gibbons, Chair of the Debt on our Doorstep campaign, and Professor Udo Reifner, Chair of the European Coalition for Responsible Credit urge the UK government to place new obligations on British banks to both act responsibly and ensure access to credit for low income households. They argue that assistance to the banking industry at this time should not be given on a no-strings basis and that an urgent review of the role of bank policies that exclude the poor should now be undertaken with a view to removing the market segregation that gives rise to sub-prime lending and has led to the current crisis

"This crisis has been caused by irresponsible lending practices in the U.S, and we know from the FSA's work in recent months that UK sub-prime lenders have also been irresponsible. As mortgage costs rise in the UK, low income consumers will face the same problems as their American counterparts, and this will magnify the impact of the credit crunch in the UK. Ultimately, lenders will become more restrictive in their lending; on the face of it a good thing, but in reality it will drive low income households into further difficulties and leave them in the hands of predatory and extortionate lenders.

We call on the Government to place greater duties on mainstream lenders to meet the credit needs of low income communities; for them to be obliged to act with responsibility and to provide access. The current segregation in the credit market must be abolished as this has directly given rise to the current crisis. Only with those obligations in place, can central bank and government assistance to the banking industry be justified. What we need now is banking for, and not against, the people."

Full statement follows:

The cause of the current crisis : US lender irresponsibility and greed

The causes of the credit crunch affecting Northern Rock clearly lie in the irresponsible lending practices of US sub-prime lenders. Mortgages have been provided to low income households in a variety of predatory and extortionate ways on the assumption that house price rises would protect the lender from the risks of default. However, not content with providing honest products that would enable poor people to access home ownership, the lenders constructed products that allowed them to be exploited (for example adjustable rate mortgages, and mis-sold 'liar loans' that did not require brokers to check applicants income details). At the heart of the problem was a 'get rich quick' mentality of US sub-prime lenders and a lack of ethics or responsibility to the borrower in the long term. With the downturn in the U.S economy these excessive risks have now come home to roost. Mortgage foreclosures in the US are at a record high, and the human cost is impacting at a political level with the US Government forced into intervening to protect genuine borrowers from bankruptcy.

Global financial services transmit risks from the US to Europe

The risks taken on by US sub-prime lenders have now been transmitted to mainstream credit markets in Europe through a variety of weird and wonderful methods of debt securitisation that were bought into by banks across the globe. In the same way that US sub-prime lenders did not care about the financial position of their applicants, the UK and European banks paid no attention to the true value of these financial instruments. As a result, no lender in the UK and Europe truly knows their own exposure^[1]. Not knowing the level of exposure to these 'junk bonds' affects even those banks that have large levels of deposits. Even they are now unwilling to lend out cash without demanding a much higher price than previously - leading to rate rises that will ultimately cause problems for all households with mortgages or outstanding credit. The central banks have a choice of intervening with cash handouts for financial institutions that are worse hit; effectively subsidising the irresponsible with tax payer's money; or sitting back whilst more households struggle to cope with increased mortgage costs.

The Credit Crunch

Meanwhile the credit crunch affects more than those that are exposed to sub-prime risks. Northern Rock does not have much direct exposure. But, as a relatively small holder of deposits, its business model requires it to have access to large amounts of credit to fund further lending. In recent statements, Northern Rock states that they had recently scaled back their lending. That may be true in comparison to the past few years during which the company sought to grow at exponential levels.

But Northern Rock was also guilty of underestimating the likelihood of interest rate increases and had sold large numbers of mortgages on cheap fixed rate loans in order to attract a major market share. It had borrowed its own money on short term, variable, rates but lent on a longer, fixed term basis. As a result, many of its borrowers are now paying back at lower rates than it must itself pay back its own creditors. To address this, Northern Rock had to raise finance to lend further. When it could not afford to obtain this at market rates it went to the central bank for help. For this reason, despite central bank assurances, the so-called naive and 'herd' behaviour of depositors seeking to take out their savings from Northern Rock is, in fact, rational behaviour. The company is not viable in today's changed market place, and that is reason enough for depositors (acting as small investors) to decide to switch their money elsewhere.

Those UK bankers that have been at the forefront of applauding the free movement of capital around the globe and have consistently advocated for the liberalisation of capital controls with little sympathy for the countries they deprive of investment, now find that they are victim to the same effects as their depositors remove their investments on en masse all over the country.

What Next in the UK?

The UK's own sub-prime housing market has been booming in recent years^[2]. As mainstream banks withdrew credit from low income households, and as house prices increased, the sub-prime lenders moved in. Regulation of this sector of the market has historically been weak. In 2005, the FSA warned that 60% of sub-prime mortgage loans were sold without proper knowledge of the applicants financial circumstances. In addition, they reported concerns about the suitability of sub-prime mortgages being sold as a means of debt consolidation:

"...in 80% of cases, there was lack of evidence to show how the recommended sub-prime product met the customer's needs and circumstances; and in 67% of those cases which involved debt consolidation, firms could not demonstrate that they had taken account of the additional requirements related to debt consolidation mortgages and thus it was unclear whether the recommendation was appropriate" (FSA press release, September 2005)

Despite having issued good practice guidance to mortgage lenders and brokers, the FSA found on conclusion of a further investigation in July 2007 that:

"None of the lenders adequately covered all relevant responsible lending considerations in their policies. For example, some firms' lending policies contained unclear affordability or self-certification requirements...In many cases, lenders did not apply their own policies in practice. For example, some firms failed to check the plausibility of information, as required by their own lending policy...There were also failings by lenders to monitor the application of their policies, which resulted in the approval of potentially unaffordable mortgages."

These regulatory failings, coupled with rising mortgage rates and an increased overall debt burden amongst UK low income households is starting to lead to increased defaults and repossessions. Only last month, the Council of Mortgage Lenders in the UK revised their repossession figures to take account of the increased activity of sub-prime lenders in this respect.

The problems that we are witnessing in relation to the current US sub-prime market problems will be repeated in the UK, causing the credit crunch to become further entrenched. The initial response of lenders will be for them to transform themselves into the advocates of responsible lending - repeating the so-called 'flight to quality' that caused the mainstream markets to desert low income communities in the late 1980's and 1990's, and which created the conditions for the rise of sub-prime lending. As the credit crunch impacts on both the housing and consumer credit markets, more and more people will become excluded from mainstream credit. Predatory Home Credit and Payday lenders must be rubbing their hands at such a prospect.

Why we need banking for the people

In the final analysis this process will result in a further entrenchment of the current segregated credit market - with larger numbers of people cast outside mainstream financial services being charged increased prices.

As genuine consumer advocates of access to responsible financial services, we urge the UK Government to think for the longer term and to introduce measures to expand credit through mainstream financial services to people on low incomes. We ask for them to end the current dual market for credit that has given rise to this current crisis. An injection of capital to financial institutions now must be coupled with requirements to meet the needs of the whole population for financial services at fair prices with strengthened regulation. We call for financial services to meet their obligations - to provide both access to credit and to exercise ethics in the provision of that credit. Now, more than ever before, we need banking for the people.

 

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^[1] A fact reinforced by the September market summary from the Council of Mortgage Lenders (see their website).

^[2] Datamonitor report that the UK sub-prime market has been growing since 2004 and that gross lending increased by 28% in 2006 alone with exposed lenders including DB Mortgages (Deutsche Bank), Abbey, Alliance & Leicester.

Government Remains Complacent about Debt Problems

The Government's latest report on household debt levels retains its complacent attitude to Britain's credit problems. In line with the approach taken in previous reports, no analysis of the extent of debt problems by income group is undertaken, and only general remarks concerning average debt levels is provided.

As debt levels have risen, the Government argues, so too has wealth - in the form of house prices. Additionally, the DTI report stresses that, on average, the ratio of savings to debt has remained constant - so people have the ability to use savings to cover immediate problems in debt repayments.

However, this ignores the fact that for the poorest the position with mortgages, house prices and saving is irrelevant - they rent their homes and half of them have no savings at all. For this group, the growth in their unsecured debt burden in recent years now represents a form of additional taxation that must be paid from their future incomes, deepening effective child poverty levels. Although the general level of unsecured debt has not increased in the last six months, this is unlikely to be evenly distributed across the income scale, with a greater increase in the debt burden of the poorest entirely possible even though the average has remained static. This is borne out by an earlier Bank of England report (based on data from the NMG survey in 2006), which reported that the unsecured debt burden for renters was continuing to increase.

Whilst the Bank of England dismissed this increase as largely irrelevant in terms of its impact on the macro-economy due to the relatively small level of total debt owed by renters compared to mortgagors, it is still extremely relevant to the Government's achievement of its child poverty targets and should not be ignored by the DTI report which is published as part of the Government's broader over-indebtedness action plan.

In relation to mortgage lending, the report fails to note that effective interest rates are at their highest level since 1991, due to the fact that secured lending has outstripped both retail price inflation and the growth in wages. As a result, relatively small increases in interest rates now have a greater impact on those mortgage holders that cannot afford to move themselves onto fixed rates.

In response to the situation, Debt on our Doorstep have today written to the DTI requesting that they provide an analysis of household debt by income level in all future reports and explain why effective interest rates are not reported.

FSA highlights irresponsibility in mortgage lending

The Financial Services Authority (FSA) has called on firms giving mortgage advice to improve their processes after new findings showed that only one third of the firms it sampled had robust processes in place to provide customers with suitable advice.

The FSA reviewed 252 firms of differing sizes through mystery shopping,visits and questionnaires between June and October last year to establish a baseline of the process by which advice is delivered in the mortgage industry. Scope for improvement was found in all aspects of the advice process. Some of the poorer areas identified were the assessment of customer needs, including affordability; training and competence; overall systems and controls; and record keeping.

Clive Briault, Managing Director of Retail Markets at the FSA, said:

"We found significant failings in the advice giving processes in a number of mortgage firms. Poor processes increase the risk of unsuitable advice being given. It is essential that firms have robust processes in place, so that they treat their customers fairly and provide suitable advice. It is crucial that customer needs are assessed properly. Customers should consider what they can afford both now and in the future, taking into account any likely changes to their circumstances."

Examples of bad practices included:

Affordability was assessed based on the customers' income and costs of servicing debt only. No account was taken of other regular expenses incurred by the customer.

No income and expenditure assessment was carried out prior to recommendation. Reliance was placed on the customer stating they could afford the payments.

Industry average figures sourced from internet websites were used to determine the customer's affordability without checking that this represented an accurate figure for the individual customer in question and did not assess whether the client lay significantly outside the average.

Dood Chair Warns of Debt 'Tipping Point'

Damon Gibbons, Chair of Debt on our Doorstep, has warned that 2007 could be the year in which thousands of consumers are tipped into over-indebtedness. In an interview for the BBC, Gibbons stressed the fact that the growth in secured lending has outstripped the growth in house prices in 2006, and that only small interest rate increases in the coming year would result in the ratio of borrowers' interest repayments to their income exceeding the levels seen during the early 1990's, when housing repossessions reached their peak.

The UK's sensitivity to interest rate rises was confirmed by Howard Archer, UK economist at Global Insight, who stated:

""It is true...that due to over-indebtedness more people will feel the effects if rates just rise a little bit than would have been the case in the past."

Debt on our Doorstep is warning that those most at risk will be mortgage payers unable to afford the fees to move to fixed rate or discounted mortgages and who are coming to the end of initial two or three year discounted mortgages which partly fuelled the demand for housing, and house price increases.

The interview comes in advance of the release of Debt on our Doorstep's New Year Manifesto for Fair Lending, due to be released on Monday 15th, January 2007.