Bloomberg Article Uk Subprime Worse Than Us?

[Gremlin]

"U.K.'s Subprime Crisis May Be Worse Than U.S.'s: Matthew Lynn

2007-08-07 19:17 (New York)

Commentary by Matthew Lynn

Aug. 8 (Bloomberg) -- We are now all familiar with the

damage that can be done to financial markets by a subprime

lending crisis. Global equity markets have taken a battering

recently because of concerns about U.S. home mortgages.

So which country is next?

The U.K. has had a property bubble every bit as crazy as the

U.S.'s. Valuations were stretched, and lending criteria loosened.

And now arrears are starting to rocket, even while the economy

remains healthy.

Not only does the U.K. face its own subprime crisis, it

could be far worse than in the U.S.

The latest figures on debts and mortgage arrears in the U.K.

certainly make grim reading. Households ``are getting into more

trouble when it comes to their mortgages,'' London-based

consulting firm Capital Economics Ltd. said in a note to

investors. ``With higher interest rates yet to have their full

effect, mortgage arrears are likely to rise further, while

unsecured bad debt might start to rise again too.''

The signs of trouble ahead can be seen in the number of

homes now being repossessed because their owners can't keep up

the payments. According to the Council of Mortgage Lenders,

lenders foreclosed on 14,000 properties in the first six months

of the year, 30 percent more than in the year-earlier period.

That reflected ``the impact of an increasing amount of subprime

lending within the overall market,'' the council said in a

statement on the figures.

Britons in Debt

Arrears aren't in great shape either. An estimated 125,100

households are behind with their mortgage payments, about 1

percent of the total, according to the council. Home owners

behind with the payments will have their homes repossessed a few

months down the line, unless their finances improve.

The wider picture of indebtedness isn't much more

comforting. The British are deeper in the red than any other

major economy. According to data from the National Institute of

Economic and Social Research in London, the ratio of household

debt to personal income is 1.62 in the U.K., compared with 1.42

in the U.S., 1.36 in Japan and 1.09 in Germany.

The U.K. is now facing a subprime crisis on a similar scale

to the U.S. As anyone who has taken out a mortgage in Britain

will know, banks shovel out money without asking many questions.

A review by the U.K.'s Financial Services Authority last month

criticized reckless lending in the subprime sector, which has, it

said, ``resulted in the approval of potentially unaffordable

mortgages.''

No Proof of Income

The British market doesn't fall neatly into ``prime'' and

``subprime'' categories. Most of the mainstream lenders offer so-

called self-certified mortgages, which require no proof of

income. Plenty of prime borrowers -- meaning people who haven't

defaulted on a loan yet -- are likely to take out mortgages that

will be hard to make the payments on.

The U.K. subprime crisis may be a lot nastier than the U.S

one. Here's why.

First, despite the mounting evidence that people can't

afford them, house prices continue to soar. The National Housing

Federation predicted this week that British house prices will

rise 40 percent in the next five years, taking the average value

of a home to 302,400 pounds ($618,000) by 2012.

The average British home already costs 11 times the average

local salary, and that figure continues to increase. It is driven

mainly by the U.K.'s small geographic size, high levels of

immigration, and very low levels of house building. People have

to live somewhere -- a home, after all, isn't an optional item

for most of us.

The net result is that even as payment problems mount,

people will carry on taking out bigger mortgages. What choice do

they have?

Rate Differences

Next, U.S. interest rates may have reached their peak and

could soon fall. In the U.K., that isn't the case. The Bank of

England is likely to raise borrowing costs at least once more to

6 percent. If the housing market and general inflation don't show

any sign of responding to that treatment, interest rates could go

higher still. That won't help borrowers already hard-pressed to

make their payments.

There should be two self-correcting mechanisms for fixing a

subprime crisis in the housing market. House prices should gently

fall, making properties more affordable, and reducing the size of

loans. And interest rates should stabilize or fall, making the

payments on those loans easier to maintain.

Neither seems to apply in the U.K.

Instead, interest rates are rising and so are house prices.

The result is that thousands of families are left in a vulnerable

position -- and so are the banks that have lent them money (not

to mention the investors who have bought those loans as they have

been sold on).

Just Walk Away

While the property market rises, everyone will be safe. If

your house is worth more than your mortgage, you will be

desperate to hold on to it. If you get into trouble, you can

always sell it, repay the loan, and move somewhere cheaper.

Yet, as the U.S. has discovered, if house prices start to

fall, that arithmetic changes. If you are in trouble with your

mortgage, you can't pay it off by selling. There is little

incentive to keep up the payments. Why not just walk away, and

hand the keys and the problems over to the mortgage company?

Britain hasn't reached that point yet. But if it does, the

mess could be even worse than in the U.S."

[Realistbear]

Sub-prime crisis worse in UK than US. Just caught the story on Bloomberg TV. Searching for link.

Edited August 8, 2007 by Realistbear

[karhu]

Sub-prime crisis worse in UK than US. Just caught the story on Bloomberg TV. Searching for link.

For sure. Furthermore, we're aggressivley marketing buy-back schemes, which have already been vitually outlawed in many US states. This UK may be the last to fall, but I can't help thinking we're going down Japanese style.

[Realistbear]

The wider picture of indebtedness isn't much more

comforting.

The British are deeper in the red than any other

major economy

.

According to data from the National Institute of

Economic and Social Research in London, the ratio of household

debt to personal income is 1.62 in the U.K., compared with 1.42

in the U.S., 1.36 in Japan and 1.09 in Germany.

The U.K. is now facing a subprime crisis on a similar scale

to the U.S. As anyone who has taken out a mortgage in Britain

will know, banks shovel out money without asking many questions.

A review by the U.K.'s Financial Services Authority last month

criticized reckless lending in the subprime sector, which has, it

said, ``resulted in the approval of potentially unaffordable

mortgages.'

'

Thanks for the link!!

I have always felt that Gordon was too complacent about our economic health given the chronic state of the housing crisis and debt levels. We should remember that Great Crash I hit when multiples were around 4:1 or so. Today we are 9.3:1 which says that Great Crash II should be about twice as bad as its glorious predecessor. Our avereage house price is almost 70% higher than the US average and we earn less after taxes. Gordon is printing money at the rate of 14% growth a year and our goverment deficit is out of control as it strives to pay off the enormous civil service bill caused by Gordon's recruiting binge when he ascended to No. 11. Our trade deficit was reported last month at something just over 6 billion and NS Oil is no longer there to bail us out. The "Miracle Economy" is an illusion and its about to come to a sharp end.

Edited August 8, 2007 by Realistbear

[Realistbear]

http://www.citywire.co.uk/News/NewsArticle...&NewsPage=4

....../

Meanwhile, sub-prime mortgage specialist Kensington Group has predicted its arrears rates will rise by as much as a fifth in the coming year. The proportion of Kensington’s total mortgage book 90 days or more in arrears improved slightly from 9.6% to 9.4% in the first half of this year, but chief executive Alison Hutchinson says: ‘You would expect arrears to rise after the rate increases. We have always set a range of 10% to 12%.’

With homeowners deeply in debt to the tune of £1,300 billion, and struggling to make mortgage repayments, demand from investors for sub-prime products has soared and there have been many new entrants into what is seen as a more profitable market than prime lending. There are now 56 operators in a market in which there were just 24 a year ago and competition for new business is fierce, resulting in a relaxation of lending criteria – just what happened in the US.

...../

I doubt Gordon has enough time for a GE as the poisons that have been lying in the mud are hatching out too quickly! Things are just going to get worse and worse from now on as we bid adieu to the nightmare once known as the "Miracle Economy" that priced out millions, indebted millions more and lowered the quality of life for all.

[davidhpc]

somebody posted a thread today about a guy on income support who was struggling with his mortgage. good quality lending.