Saturday, Nov 24, 2007
Subprime? Here? Noooo!! Impossible, It is different here, But... I thought... short supply... immigrants... divorces... all gone?
Times: Sub-prime ‘time bomb’ is set to explode in Britain
"In the past, heavy sub-prime borrowers could find a cheap deal if their loan was equivalent to 95 per cent of the value of their home – but the loan-to-value (LTV) ratio has dropped significantly." That was unsustainable madness, do you folks agree? Then there should be no doubt that a heavy correction is coming... regardless what BoE can or cannot cut next month (David, take notice)
Posted by confused76 @ 07:39 AM (1570 views) Add Comment
25 Comments
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1. handle_it said...
Impossible to argue with the maths. However, no one at least for the moment, is really giving accurate estimates of how many people will be affected by increased borrowing. I work in the Motor Trade which is being hit hard. The showrooms are empty. I was around in the 90's crash and it wasn't pretty. Looks like this going to be at least as bad.
2. sold 2 rent 1 said...
Having chatted to a friend recently, we came to the conclusion that a large slice of the BTL brigade have the mindset that the objective is to buy as much property as you can with the bank's money. If prices go up you win, if prices go down you walk away.
Either way they think you cannot lose.
The problem is the banking system relies on people honouring their debts. It only takes a certain propertion of reckless borrowers like this to bring the whole system crashing down. What this limit is and whether we will reach it is the big question.
3. Orwell said...
Have David Smith or the Council of Mortgage Lenders read this? Or what constitutes Sub Prime (in yesterday's Guardian).
4. denzil said...
Do we know how many mortgages on domestic property are classed as sub-prime in the UK?
If so do we know how many are 95% LTV and bought two years ago?
It's difficult to gauge how large the "time bomb" The Times refers to is.
The article seems to switch between sub-prime and standard mortgage types at will and is light on fact that would help it justify the "time-bomb" in the title.
It could be a timebomb that would trigger a crash but it seems little more than fashionable sub-prime hysteria that fill column inches at present.
5. C'mon Correction said...
I agree Denzil. We're hearing on the news about the US "sub-prime" problem that indicates the UK also has a "sub-prime" problem just starting to develop.
But what is sub-prime? surely the average mortgage a first time buyer or BTLer these days are ALL sub-prime - ten years ago they would have classed sub-prime for sure. So many people in the UK (most of my friends) have either 100% mortgages or over 3.5 times their salary or both! The bubble in ther last five years has existed due to this, this looks for sure like it will implode over the next few years.
6. paul said...
"Either way they think you cannot lose"
s2r1, this argument forgets that when lots of other people have the same idea, there's a rush for the exit creating massive downward pressure on prices.
7. Lukeskywalker said...
This paragraph was particularly frightening. Its strange when you've fully expected to see this happen, from becoming more aware of the price of commodities in 2004, but seeing it actually happening leaves me feeling a perverse conflict of self-satisfaction (particularly when my other half has been in tears at my refusal to start a home while all our friends are), and that sense of trepidation as one might when watching a good mate about to do a bungie jump.
' Two years ago, borrowers could snap up a two-year fixed-rate deal for heavy adverse borrowers of 6.58 per cent. Hundreds of thousands of homeowners face being moved on to their lender’s higher rate, which typically will be at 9.5 per cent. On a £150,000 mortgage, this will leave homeowners facing an extra £280 a month in loan repayments. Thomas Reeh, of Black & White Mortgages, the sub-prime broker, said: “There are very difficult times ahead for customers who are habitual defaulters, or heavy sub-prime. They are unlikely to get a new competitive deal, and face significant pressure from their existing lender.” '
A family stretching themselves to only £150k suggests that another £280 will be hard. I think we're going to be seeing much less of Phil Spencer and alot more of "Cillit Bang Headline" Jeremy Vine.
8. the reaper said...
This one will be worse than the nineties.The problems are far more widespread taking in govts and a much wider segment of the public.Crucially,our economy in the UK is nowhere near as strong as it was in the 90's if you look behind the govt figures in terms of the size of the public payroll,govt debt,and the amount of people on incapacity benefit-which takes them off the unemployment figures.They will have to raise taxes in a recession,no two ways about it.
I also think there is a possibility that there will be more runs on banks/small building societies,A&L shares yielding 8%(does someone know something we don't?).And all this is not considering currency issues sucha a weaker sterling,stronger Yen
9. New User 2007 said...
Denzil.
They are saying what is standard practise...most fixed deals are two years. In the past most people could remortgage and go to another cheap fixed rate deal after the last one finished. The ones who do not remortgage move automatically to a higher SVR if they stayed on the existing fixed rate deal (after the fixed rate period has ended). Most people know that makes sense i.e. a new fixed rate deal was always lower than the SVR.
However, now, people cannot access the new cheaper fixed rate deal as the banks are asking for greater proof of income and higher deposits. This means they are forced to stay with their existing lender on the SVR. These people number possibly th hundreds of thousands mentioned.
In terms of sub-prime we do not use the same definition as the US. They include ninjas (no income, no job, no assets) but I believe also people who are self-certified, on large income multiples and had low deposits (i.e. even when they did have an income, a job and some assets).
Our sub-prime definition assumes that the other large part (along with BLT) of the mortgage market in the last three years, that is, self-certified, is not sub-prime. I think this is complete rubbish, as I do not know one person who took the self-certified route based on the truth i.e. they did it to exaggerate their incomes, not because they were self-employed. The BBC told the FSA that in 2003 in a documentary.
I am sure the 55% of multi-owing professional land lords will declare bankruptcy if possible. However, they bought over so many years that it would not be in their interests to walk away i.e. better to sell and consolidate. The "non-professional" BLTs i.e. with few properties could walk also declare bankruptcy as they will have bought more recently so cannot use older buys to cross-subsidise more recent ones i.e. may be easier to declare bankruptcy. HOWEVER...
I was under the impression that the voluntary bankruptcy deals that people think will give them an escapte route actually require banks to agree them. One of the reasons bankruptcies went down recently was not because people suddenly had more money, it was because banks merely refused to agree bakruptcy deals with the companies that were set up to help people become bankrupts.
I am not an expert on bankruptcy (I think there are two methods now available in the retail sector), but I do not think walking away is as easy aor as logical as some of these BLTs you mention think it is.
10. confused76 said...
Denzil
good point!
Add the "mates mortgages" to the growing list of sub prime
First-time buyers unable to go it alone
http://www.thisismoney.co.uk/mortgages/mortgages/article.html?in_article_id=426739&in_page_id=58&ct=5
Mortgage lenders have attempted to ease the path of first-time buyers with more flexible 'mates mortgages', 100%-plus homeloans and guarantor deals.
However, by taking on extra debt, first-time buyers are finding themselves in the position of being unable to pay their bills on their own should things go wrong.
Amanda Docherty, of Scottish Widows Bank, said: 'First-time buyers are increasingly pooling their resources in order to get on to the property ladder.
'In principle, with a widening gap between earnings and house prices, it is a good idea, as it can help overcome some affordability issues. Two salaries stretch further than one.
'However, this is not an arrangement that people should rush into. Nobody wants to end up in a situation where they find it extremely difficult to share a home with someone they no longer get on with but can't afford to do anything about it.
11. holding out said...
"Either way they think you cannot lose"
I don't think this is a reference to HPI but a warning of the exposure of banks to bad debt if lots of people walk away. It's a Heads I win Tails you lose situation from the point of view of the punter - although they still stand to lose their credit rating and a few quid in legal & arrangement fees unless they've managed to get a mortgage that bundles it all up.
12. ck one said...
Every time the banks open the lid of their exposure to the credit sanity check that is underway they notice that the turd inside the box isn't going away, in fact it's actually getting bigger and no one will take it off their hands as their turds are just as big.
As to where this ends up, in all seriousness I think your looking at the end of the anglo saxon quasi free market model, the first great depression of the 21st century and on the other side the shift of global power from west to east with a BRIC's adjusted quasi controlled market model. The US will no longer be the power it once was.
13. stillthinking said...
Walk away? How?
Only if you can have residency in another country. Mortgage debts last for 12 years and you need the cooperation of the bank to declare yourself bankrupt. They won't cooperate. They are already restricting IVAs. You can pay 100K over 12 years, just a terrible waste of life.
The banks won't let go. Why on earth would they? I am not even sure that the debtors over the pond can just hand the keys back.
Certainly some people won't ever be able to pay, but they -will- be forced to pay what they can. Any bank that didn't relentlessly pursue monies owed would be out of business already, but they are not out of business, and there is a whole infrastructure both inside and outside purely for the recovery of debts. People will be working for the banks for a -long- time is all.
I think there will be people who try and get out of it, but I don't think they will be successful.
New Labour are not in a position to say, ' Oh by the way you don't have to pay your debts back because of this new law we just came up with'.
Wait for the public fury when Labour back-track on the taper relief changes, there will be loads of people who realise they delayed in a collapsing market, committing financial suicide, for the benefit of the Labour party. Christmas will be a hiatus, but can you imagine what the situation will be like in April next year !!! I can't but I bet dramatic.
Rents have collapsed in many cities, if London goes as well, can you imagine ... Lordy.
14. stillthinking said...
If I can qualify my last sentence, houses need to be empty when you are attempting to sell. So that pulls houses out of the rental market. The fact that it doesn't make sense to BTL now because houses are too expensive is based on the fact they are too expensive(!). If the real value collapses then suddenly renting starts looking much better. So the houses for sale now, and there are many, will return to the rental sector which will force rents down. Quite aside from the absurd idea that the UK economy and job situations stays in excellent shape.
How on earth can the UK economy maintain growth when there is a liquidity crunch, inflation in China, high oil price, maxed out taxation and a drop in consumer spending?
15. voiceofreason said...
You mention the "borrow as much from the bank and buy as many BTLs as you can" brigade.
I wonder if this explains a phenomena seen in The Solent this summer.
We noticed that previously genteel little harbours like Yarmouth on the Isle of Wight have been ruined by an influx great big motor yachts full of very rude and loud baseball cap wearing types. They had parties late into the night, keeping every one awake.
They jump queues at the marine diesel pumps and unleash a tirade of abuse if anyone remonstrates with them.
etc etc
It has become so bad that my relatives have actually sold their yacht after 60 odd years of Solent sailing.
Maybe the banks will take their yachts away next summer. That is a lovely thought :-)
16. Bangybongo said...
To the person who wants clues as to the scale of our subprime: Northern Rock. Northern Rock -- in my opinion disingenuously -- said it little exposure to subprime, SIVs and SIV-lites. Were that the case, were its loan book as solid as it said, then the Rock would have been able to keep getting funding either through bond issuance, BoE (non punitive) or the interbank market (i.e. other banks.) Clearly, it didn't fancy its chances of raising money through bonds, interbank lenders said ``feck off,'' and the BoE didn't see the asset quality to meet the Rock's lending needs without lending punitively. So it lent punitively in return for the security of the Rock's first class (yeahright) assets, lumbering taxpayers with the loans (really, you're too kind.) Back in the days when it was pioneering, Northern Rock sold what you might call consolidating loans that funded trinket-buying frippery on scales above what the punters could afford (that is my reading of the true reasons for the bailout, not because I'm intimate with the Rock's loan book.) Yes, those people were and are honest and decent -- just like their U.S. counterparts -- but they got saddled with more debt than they could handle. And that, when push comes to shove, is what subprime lending really is: poor quality banking. Roman Abramovich could be subprime if you lent him too much and he took unwise decisions about how to spend what you gave him. So in a nutshell, by my definition, huge great swathes of the UK will become subprime at the mere suggestion of house-price declines (because security of assets will become flakey).
17. Sold My Soul To The Never Never Never said...
These teaser rate mortgage remind me of the deferred mortgages which were around in the early 90's with extremely low interest rates but then the debt was rolled up and after 5 years your debt was higher than your original mortgage They were supposed to be sold to professionals (I worked at Abbey National then) but every Tom, Dick & Harry was sold them and I remember a high proportion of them going to the wall. Excuse me for the neverending reminiscing when I blog but it is only with the benefit of hindsight that I could see that this was going to be a sorry mess.
18. bidin'matime said...
Still Thinking - the banks cant stop borrowers going bankrupt - anyone can declare themselves bankrupt.
The mistake that society (ie the government) has made is making bankruptcy too soft. It should be a crime to conduct your affairs in a reckless manner and then go bankrupt - the problem is defining recklessness - given all the VI hype, it wouldnt be difficult to argue that you were just following the advice you read in the media, ie invest in 'bricks n mortar'.
Perhaps the wider problem is that we live in an era when, whilst on the one hand we have the 'claims culture' - 'someone must be held to account', on the other hand, personal responsilbilty is ducked by almost everyone in any position of influence / authority. So organisations take the blame, not individuals. So we are left with a society where people always think someone else must be responsible, even for their own mistakes.
The sad fact is that thousands, possibly even millions, of people will walk away from bankruptcy feeling that they did nothing wrong - it was society that forced house prices down, it was the bank of England putting up interest rates, it was their bank's fault for not offering to renew their discounted rate, it was the governments handling of the Northern Rock fiasco, it was England getting knocked out of Euro 2008 and depressing the nation - it was everyone else and everyone else now owes it to them to look after them in their hour of need.
19. Sold My Soul To The Never Never Never said...
Bidin'matime - "The sad fact is that thousands, possibly even millions, of people will walk away" from their responsibilities. If the worst case scenario was to happen then banks would go under if they "can't stop borrowers going bankrupt". This is very scary stuff!
20. mrmickey said...
We now live in a compensation/dependancy culture, every day I see members of the public demanding action i.e. bale outs from the government on some issue or other. The last one I saw was for people who had bought property on the edge of sea cliffs then when the property finally falls in to the sea they think they should be compensated by the government although they admitted that the solicitor said the property would only last 20 years max. What I find worrying is that with the required amount of pressure the government will bale out businesses and individuals. Therefore when HPC finally does start snowballing just watch the government bale out all those BTL investors and subprime borrowers from their own stupidity it's already started with Northern Rock and will only end with the collapse of Sterling and the economy.
21. Geoffreeves said...
Even the government doesnt have that much money to bale out every Tom Dick & Harry that gets into financial trouble.Many people will suffer the consequences of this credit crunch fiasco for decades to come."still thinking " is right,once the banks get their claws into defaulters they dont very often let go.The whole system is geared up for the benefit of big organisations,and not individuals.
Credit is and always has been finite.It was just a matter of time before the whole pyramid selling of credit came to a grinding halt.
The credit train has now hit the buffers !!
22. planning4acrash said...
I am embaraced being a member of a species that is so Frickin STUPID!!
23. stillthinking said...
hmmm. So the banks are in big trouble then. What about if you can pay the debt, i.e. you have enough money to pay your mortgage/credit card/what have you, but you don't consider it worthwhile. Or you can pay the mortgage OK but because the house value went down considerably there is no point because you lose money. Can you declare a sort of voluntary (unneeded) bankruptcy in your own self interest? I had always thought a judge had to decide.
I spoke too soon.
24. bidin'matime said...
If you have more debts than assets, then you can declare yourself bankrupt. Search 'can I go bankrupt' in Google and read all about it. However, you will also see the disadvantages - difficulty getting credit etc. So the advice would normally be to come to an arrangement with the creditors (normally a reduction in debt and/or interest) and pay off the debts over a period time (if done formally, this is an IVA, or Individual Voluntary Arrangement).
Whichever, the starting point is more debts than assets, meaning that the person is in a hole and must wave goodbye to a chunk of their future income to repay the debts. Given that they often got in the hole by not having enough income in the first place, the bankruptcy option becomes attractive – simply wipe the slate clean and start again. This is why it should not be made too easy, too ‘normal’ – how long before the talk at dinner parties is - “But daahling, surely you’d be better of just going bankrupt and walking away from all that nasty negative equity – we did, didn’t we Gerald, and we’ve never looked back – certainly wouldn’t be able to afford our annual skiing holiday if we had to fritter it all away paying off those ghastly banks for the next 25 years…”
Bring back debtors prisons…
25. mrmickey said...
People are thick but that's the way they are now conditioned in society to be, look at what children are taught at school look at the programmes popular on tv, it's all designed to lower peoples horizons and keep them dumbed down and blinkered. The last thing the government want is free thinking well educated citizens, they might start asking awkward questions, they might start reading the small print, they might start questioning the system.