Mortgage News

With interest rates at 3% (and expected to fall soon), you would expect a sharp uptake in the number of mortgages. However, mortgage lending conditions remain tight. This is because:

• Banks still reluctant to lend. The Libor interbank rate is nearly 1.5% above the Bank’s base rate (usually it is just marginally above the base rate). This Libor rate reflects the unwillingness of banks to lend.
• Falling House Prices and Negative Equity. This is probably biggest reason for continued decline in mortgage lending. Falling house prices mean banks want to protect themselves by demanding bigger deposits. But, falling house prices are a great disincentive for potential homeowners to buy.
• Banks have been removing mortgage products from the market. Any new tracker mortgages are coming at significantly above the base rate (rather than below it during the boom years)
• HBOS, Northern Rock and Bradford & Bingley have virtually left the mortgage market as they struggle to improve their balance sheets.

Is the Demand for Mortgages There?

• When HSBC went looking for business in the re-mortgage sector it found demand was greater than it could cope with. Therefore, it soon left.
• The one bank to actively increase its market share is Abbey, owned by the Spanish group Santander.
• After the interest rate cut, there was a marked increase in activity on mortgages.co.uk
• Some banks such as Barclays and HSBC have been reluctant to pass base rate cuts onto consumers.

Outlook for Mortgages

• The recession will cause rising unemployment. Some forecast unemployment could rise to just under 3 million by the end of 2009. As unemployment rises more will be forced to sell their house (whatever interest rates). This will keep house prices falling and as house prices falling, banks will continue to demand large deposits to protect against negative equity
• After the merger of Lloyds TSB and HBOS. It may enable HBOS to start lending more mortgages.
• Northern Rock is currently trying very hard to repay the government debt. But, the government may start to encourage it to be less aggressive in repossessing homes and encourage it to lend more new mortgages.

Original post by Tejvan R Pettinger

Readers Question: Can you explain who is the loser are and why others may gain when house prices fall?

Those Who Gain From Falling House Prices

First Time Buyers Trying to Get on the Property Ladder. House prices have fallen at least 15%. This means the average house is about £20,000 cheaper. This reduces their long term mortgage repayments and standards of living. (The problem is that although house prices have fallen, it has become more difficult to get a mortgage, but, this might change in future)

Homeowners Who Wish to Upsize. If you live in a modest two bedroom house in the north but wish to move to a 3 bedroom house in London, it is now easier. This is because a 20% fall in a £100,000 house means you receive £20,000 less. But, a £200,000 is now £40,000 cheaper. Therefore, the move is now £20,000 cheaper. This might benefit couples who have more children or need to move to London. (House price falls have been strongest in areas like London.

(Renters. If you rent, lower house prices could lead to lower rents. However, because no one wants to buy, demand for rented accommodation is strong, therefore rents are not falling, but increasing. However, if the fall in house prices was permanent, rents may follow house prices in the long run.)

Those Who Lose From Falling House Prices

People Who Bought a House at the peak. If you  bought a house in July 2007, you will have seen a big fall in the value of your house. This leaves you with negative equity (Home value less than the mortgage outstanding) This is particularly a problem for those forced to sell their house because of unemployment. It is even more of a problem for those who got 100% or 95% mortgages.

Those Who want to downsize. This is opposite to the argument for those who want to upsize.

Estate Agents. Lower House prices mean smaller commissions. Furthermore, housing transactions has slumped giving them two problems.

People Who Remortgaged to Buy 2nd Homes. Some people bought housing as an investment in the expectation of rising prices. They are now left with negative equity.

Reverse Mortgages. Some elderly people were relying on their house value to provide for their retirement through a reverse mortgages which unlocks the value of the house. There value is now less.

People Who Are Unaffected by Falling House prices

People who have no intention of selling. If you buy a house and have no intention of moving in the next few years, lower house prices don’t have much effect. Although house prices are lower,

Renters. Renters are mostly unaffected by falling house prices.

See also: effects of falling house prices

Original post by Tejvan R Pettinger

The Credit crunch has led to a raft of books on explaining why it occurred and how we can get out of the crisis. These are some of the best selling books. The only problem is that the crisis is developing so quickly, they can quickly become outdated. I’m sure 2009 will see even more come onto the market.

The Credit Crunch: Housing Bubbles, Globalisation and the Worldwide Economic Crisis
by Graham Turner - A Critique of the free market policies which created unsustainable booms.

The Crunch: The Scandal of Northern Rock and the Escalating Credit Crisis (Paperback)

The Credit Crisis by George Soros. - George Soros explains the 2008 credit crisis from his point of view.

Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash by Charles R Morris

The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do About It by R.Shiller

• Credit Crunch Explained

Original post by Tejvan R Pettinger

The UK National Debt continues to grow. Next year, many are now forecasting a public sector net cash requirement of £100bn. This would cause public sector debt to continue its rise.

Public Sector debt is currently £634bn (Northern Rock nationalisation has now been included in official figures). The £37bn worth of Bank shares will definitely have to be included. Although, I doubt the £450bn of bank loan securities and guarantees will be included. This is because at the moment this £450bn is only securities and not actual tax payer money.

Nevertheless, if these securities and guarantees were included as a contingent liability the Government would have a national debt of approaching 100% of GDP. (and that is before we worry about all the pension liabilities which are going to be increasing in the near future.

Although public sector debt of over 100% of GDP sounds bad. I feel the government had no option but to implement a plan like the one it put together.

National Debt and difficulties of calculating

House prices continue to fall. According to London based estate agent Frank Knight, house prices are likely to fall another 15% before levelling off towards the end of 2009.

London is one of the worst hit areas with prices falling more than the national average.

Original post by Tejvan R Pettinger

In a concerted European move, the Bank of England, along with ECB acted decisively to cut interest rates by 0.5%. It is hoped that this cut in rates will help restore some optimism to the banking sector and wider economy.

However, a cut in interest rates, is likely to be insufficient to prevent the economy sliding into recession because:

• Banks balance sheets are in a miserable state.
• Falling house prices means people will still want to avoid buying, even though rates are lower.
• Banks may not pass the rate cuts onto consumers as they try to increase their profitability.
• Global downturn will impact on UK economy, which has a strong export sector.

Bank Bailout

The perilous state of the UK’s banks is highlighted by the £500bn scheme to help restore confidence in the banking system.

The cost to the taxpayer is initially  £50bn. This is in return for £50bn worth of shares in the leading banks who need the extra cash. The other £450bn involves government guarantees for bank debt and a £200bn injection into the short term money markets. More details at UK Bank Bailout

Original post by Tejvan R Pettinger

With banks suffering unprecedented losses, there is a lot of interest and speculation about the safety of banks and building society deposits.

Firstly, the government guarantee the first £50,000 of savings (and there is pressure to increase this amount). In practise, the government wouldn’t let a bank / building society go under leaving savers out of pocket.

Also, the building societies who didn’t demutualise and become banks, generally have a good business model.

Building societies are governed by stricter legislation meaning they have limits on how much funds they can raise on the money markets. This restricted their involvement in the securitised loan funds which have caused so many black holes in bank balance sheets.

Secondly, building societies are owned by their members and not share holders. Therefore, there is no share price to attack. - Like HBOS and others have suffered.

Generally speaking, whilst the banks overstretched themselves in the boom period, building societies stuck to traditional business models of lending mortgages out of savings.

Building societies were less likely to get involve in 100% mortgages, buy to let mortgages and self certification mortgages. Therefore, as house prices fall they are better insulated against negative equity. Building societies tend to have low loan to value %. Typically, the value of their loans are about 40-44% of their building securities.

They also have very low mortgage default ratios. For example, the third largest building society Yorkshire, has a home repossession ratio of 0.09%. Nationwide the largest building society is responsible for 13% of all UK mortgages, but accounted for only 1% of mortgage defaults

Finally, building societies have benefitted from a rush of deposits as nervous savers look to the relative safety of building societies.

The great irony is that the building societies which rushed to demutualise in the early 2000s, have been the ones hardest hit. - Northern Rock, Bradford &amp Bingley, HBOS and Alliance &amp Leicester

It sounds a rather rosy picture for the building societies. However, they will not be immune from deteriorating economic conditions and the general credit crisis. Like in the last recession, there is likely to be further concentration as some of the smaller building societies get swallowed up by the bigger.

However, if you have savings in a building society it is probably as safe a place as any at the moment.

List of Building societies in UK - Top 10

Original post by Tejvan R Pettinger

The American Dream Suffers a battering

America has had its fair share of bubbles and busts. The dot com boom and bust was spectacular, if relatively short lived. The response of the Fed - cutting interest rates helped to smooth over the problem. The US avoided a serious recession and for most people (unless they had invested their life savings in dot com firms) the issue was of little importance. Furthermore the rapid response of the Fed reassured markets that the monetary authorities were eager to avoid any economic downturn. It appeared that boom and busts were not to be feared.

Against a back drop of very low interest rates, economic growth and a very competitive credit market, there was a rapid expansion in the number of mortgage advances. This enabled a new generation of Americans to buy a house (especially first generation immigrants and people with bad credit histories). Buying a house seemed to be an excellent investment. Not only did you get to own your own house, but, also could enjoy rising wealth as house prices shot up.

Between 2000 - 2006, American House prices rose by 135% encouraging even more to try buying a house.

With house prices rising so quickly, Mortgage companies were willing to lend 100% mortgages and mortgages to people with bad credit history. Mortgage salesmen were encouraged to sell mortgages with little evaluation of ability to pay. In a period of rapidly rising house prices, it was easier to mask poor mortgage decisions.

The boom in house prices also caused an unprecedented boom in building. Housing was the new gold rush. Large homes were knocked down to build several apartments. In particular there was demand for new housing in affluent suburbs, outside of central cities, but, within commuting distance.

The collapse of the housing market and credit crunch have been well documented - see credit crunch explained. In short house prices fell and banks suffered from large scale losses as people simply defaulted on rising mortgage payments.

In many cases, people are simply posting the keys in the letterbox and walking off. Unable to pay mortgage payments and left with negative equity, people prefer to have the home repossessed than struggle to fight a losing battle. The problem is that home repossessions are expensive for banks. Typically, banks may get 40% less than the original loan. It is these loan write offs which are causing the Fed to have to bail out mortgage lenders like Freddie Mae and Fannie Mac. The concern is that with house prices falling and unemployment rising, there are future waves of mortgage defaults still to come.

Sell to Lender

Rather than lose through having to repossess, many banks are encouraging struggling homeowners to transfer ownership. Basically, what this does is to wipe the slate clean. The bank bears the negative equity and takes care of the mortgage repayments. Homeowners are able to sell their house without suffering negative equity. It is also better for their credit rating. For the bank it is not good but, better than the costly drawnout process of repossession.

The housing slump is exacerbated by the number of unsold properties on the market. The boom in housing builds ended only after the market had begun to fall. The result is that even in a time of falling prices, there are still new homes coming on to the market. Faced with a slump in demand and glut in supply, it is not surprising many forecast prices to fall further. At least in the UK we do not have the same glut in supply - just a stagnant market with buyers extremely scarce.

Amidst all the statistics there are many individual cases illustrating the personal costs of the housing crisis. People who have seen the value of their homes drop by $40,000. People who have lost their home, lost their credit rating and left with negative equity. It is an ugly business and the sheer scale of house price falls has taken many by surprise. The question for many Americans is when will the housing slump end? With banks still nervous about lending predicting the end may not be so easy.

Original post by Tejvan R Pettinger

Mobile phones have become such an intrinsic part of everyday life, that it is hard to imagine life used to exist without them. Mobile phones can be very useful, but, they can also eat up alot of credit if we misuse them. These are some tips to minimise our mobile phone costs and save money.

Get the Contract Right for You.

A simple way to save money on a mobile phone is to get the right contract. If you are spending more than £20 a month on pay as you go, you will probably be better off on a contract version. Similarly, if your phone is idle for several months out of the year, pay as you go can save significant amounts. Don’t just look at your use in one week, but, your use throughout the year.

Use Mobile Instead of Landline.

If you have a mobile, your landline can become redundant. This means you can save on the line rental. Although increasingly communication companies are packing together tv, broadband and telephone all together. In this case cancelling a landline isn’t that much of a saving.

Make Use of Skype / Aim / Internet

When you have access to an internet connection, make use of a service like Skype to save on your mobile phone calls. If your friends have skype as well, you will not have to pay anything. But, even calling landlines and mobiles is usually cheaper with an internet provider.

Minimise Use.

If you are on pay as you go, look for ways to minimise use. Save all the gossip for another occasion. If you like gossiping on the phone, make sure you have a contract with many free minutes. Rather than use a mobile phone as your means of socialising, arrange to meet people in person, it is even better.

I’m not a great fan of communicating by text message. Sometimes it can be useful, but, it is very tiresome as a way of holding a conversation. Texting is good for passing a simple, short, clear message.

Buying Cheap Mobiles

Many mobiles are sold at knockdown prices when they come to the end of their shelf life. Every 4-6 months, mobile phone models are replaced with newer versions. To get rid of old stock an £80 phone can be sold for £20. If you’re not bothered at keeping up with the latest fashion trends, look out for these special offers. Just remember they were state of the art 6 months ago. Even 6 months ago, the phone had more features than you used anyway, so don’t worry about not getting the latest model.

Don’t Lose It!

I wish I followed my own advice and didn’t lose my mobile phone or charger. They are expensive to replace. Insurance is worth getting for phones worth more than £100, but, for less expensive phones it probably isn’t worth it.

• 10 Tips for saving money
• Saving Money on Petrol and Driving

Original post by Tejvan R Pettinger

One year after the term ‘credit crunch’ entered into daily lexicon, the economy and housing market have both taken a remarkable change of direction.

12 months ago, Gordon Brown was delivering self congratulatory speeches with an impressive regularity. His smug self congratulation was not entirely unfounded he could point to

• low inflation
• high growth of 3%.
• The longest period of unbroken economic growth since records began
• Low unemployment

True there were some mutterings about the level of consumer debt, overvalued asset prices; but, in perspective you could argue - ‘you have never had it so good’

Credit Crunch 12 months Later

1. Inflation has broken the government’s target and  CPI inflation is heading towards 5%. Even worse, people increasingly disbelieve the official inflation statistics. Rising petrol and energy prices mean that many feel inflation of double figures is more appropriate.
2. Unemployment is rising at the fastest rate since 1991
3. Economic growth is slowing sharply; recession is forecast.
4. House prices have fallen by over £15,000 leading to a collapse in consumer confidence and spending. (Why house prices are falling)
5. Even first time buyers have not benefited from falling house prices - mortgage availability has frozen up keeping many out of the housing market. Estate agents and the construction industry have been hard hit by the slowdown.
6. The Mortgage industry has changed remarkably. Gone are the  125% and 100% mortgages in their place banks are asking for deposits of upto 25%.
7. Government debt has defied optimistic forecasts and has broken the government’s own limits. (see debt levels)
8. The Government had to bail out a major bank (Northern Rock) for first time in a generation. Today Northern Rock announced losses of £585million for the first 6 months of the year. Others fear that the worst of the bank debts is not over.

Why Has Credit Crunch Caused So Many Problems?

1. The extent of bad sub prime debt which was written off is very extensive. Because this sub prime debt was sold on in mortgage bundles around the financial system, few banks have been able to escape. This led to a fall in interbank lending and write-offs which hit bank’s balance sheets.
2. It is difficult to raise finance for new loans. Banks became reliant on securing their loans by selling to other banks. The credit crunch has made this very difficult, therefore, banks are struggling to just maintain their existing loans let alone create new loans.
3. Coincided with a peak in House Prices. On the back of new types of mortgages, the housing market retained a rising demand enabling price to earnings ratios to rise to record levels. When the mortgage sector shrank, demand for buying houses evaporated.
4. Coincided with rising oil prices. The credit crunch has coincided with another unexpected shock - rising oil prices which have pushed inflation to levels not seen for many years. This has created a double squeeze on living standards and consumer confidence.
5. Global Nature of Economic Shock. Although the developing world is taking a bigger share of exports, the US economy still has the capacity to influence the world economy. As the US and EU economy slows down it has exacerbated the UK economic slowdown.

Is the Worst Still to Come in 2009?

There are tentative signs that interbank lending is returning to normal. However, there are still concerns about the balance sheets of banks. Falling house prices mean that mortgage defaults will cause huge losses for banks. So far, the federal authorities have been able to bail out banks in trouble, but, it is not clear how much they can keep doing this.

The Good News

• Economies do tend to be cyclical, there is no evidence that this recession will be any worse than previous recessions; there is still reasonable hope the recession may be relatively short.
• Interest rates are low. Falling house prices does not increase cost of mortgage payments. Mortgage defaults in the UK are unlikely to reach 1991 levels when interest rates were nearly double current levels
• Oil prices may stabilise.
• With a slowing economy it is likely oil price rises may slow, if not fall. This will enable lower inflation and therefore, lower interest rates to boost economic growth.
• Falling house prices have some benefits.

See also

• Credit Crunch explained
• Schemes to ease credit crunch

Original post by Tejvan R Pettinger

A report by Sir James Crosby, former chairman of HBOS into the state of the UK mortgage market found that there will be no quick fix to the current shortage of mortgages in the UK. The problem is related to the market for mortgage backed securities. Between 2001 and 2007, the total of secured mortgage lending rose from £13bn to £257bn. Since the credit crunch began last summer this source of funding has dried up. Lenders don’t want to risk lending secured mortgage funds in an era of declining prices and general difficulties in the mortgage sector.

Sir James gave little relief to the beleaguered government. He warned that the shortage of mortgage funds would not be solved soon. He also warned that government intervention to boost the mortgage sector was unlikely to help. He recommended leaving it to the market to come up with a workable solution. However, he did hint that banks might be able to swap new mortgage debt for government securities - a measure that may help increase the number of new mortgages.

This is at a time when falling house prices are causing increasing calls for government intervention to help first time buyers get a mortgage. The volume of mortgage lending has plummeted 70% in the past 12 months.

Original post by Tejvan R Pettinger