Mew - Elephant In The Room

[singlemalt]

I reckon there's a good number of "homeowners" out there that due to MEW over the last few years and other commitments (personal loans, credit cards etc) will never pay off the outstanding amount on their mortgage. I personally know 3 such couples. Now quite worried 1 is trying to sell their house for this very reason. They'd relied on house prices forever appreciating in order to pay off the lion share of the massive capital of the mortgage.

With the sceptre of NE looming for even those who've 'owned' for a number of years and a price recovery to pre-crash levels many years off (if ever) this could prove to be yet another elephant in the room.

Now quite a herd gathering don't you think!!

Edited July 1, 2009 by singlemalt

[Mr Yogi]

This is huge looming problem for many apparantly affluent people who have been treating their home as a massive cash machine for years.

With interest rates low then the problem is contained. The only visible signs of difficulties will be the lack of fancy holidays and hanging onto the car for another few years.

Just wait until servicing the debt becomes unmanageable, though...

[Confounded]

This is huge looming problem for many apparantly affluent people who have been treating their home as a massive cash machine for years.

With interest rates low then the problem is contained. The only visible signs of difficulties will be the lack of fancy holidays and hanging onto the car for another few years.

Just wait until servicing the debt becomes unmanageable, though...

Add this to the very generous but misguided parents that gifted their children a deposit from money mewed out of there principal house. This was one of the main indicators for me that we were in a mega bubble/ pyramid scheme.

The unraveling will be disastrous.

[fluffy666]

They'd relied on house prices forever appreciating in order to pay off the lion share of the massive capital of the mortgage.

How did anyone ever think that this was going to work, unless we had large scale inflation..??

Hmmm.. My £200k house has appreciated to £400k.. I'll just withdraw that nice new £200k of equity to pay off the £200k IO mortgage still outstanding.. Anyone see a problem with this?

(OK, they could downsize to a £200k house - if one actually existed in this imaginary world of forever HPI)

[interestrateripoff]

This is huge looming problem for many apparantly affluent people who have been treating their home as a massive cash machine for years.

With interest rates low then the problem is contained. The only visible signs of difficulties will be the lack of fancy holidays and hanging onto the car for another few years.

Just wait until servicing the debt becomes unmanageable, though...

Many of these people should have little or no mortgage now, if they hadn't been so stupid this country would be in a far better position to weather the economic storm.

MEW was too easy to do and it help to fund a lifestyle that was unobtainable, there where no problems providing house's kept going up in value and you remain in employment.

I think what you meant was people used there home as a massive debt machine for years.

[Caribbean Beauty]

MEWing was not the elephant in the room - eventually a MEWed up to the hilt home mortgage will be paid off, if personal circs stay positive and THERE IS A REPAYMENT VEHICLE ATTACHED TO THE MORTGAGE OR IT IS A REPAYMENT MORTGAGE.

Sadly, and shockingly, the real hefalump (I have young kids) in the room is that most of these people in debt have INTEREST ONLY MORTGAGES WITH NO REPAYMENT VEHICLE. Such mortgages never existed until the late 90's and the kind of people who hold IO mortgages for anything but a transitory period are usually debtors and incapable of saving.

What do we thing the emotional effect is on the debt addled brain when the combination of growing negative equity and the hopelessness of knowing that the vast mortgage debt will never be paid off....and in x years the bank will suddenly expect full repayment of the same sum first borrowed? Misery for years (for those who get it - some will be so thick that they actually think they have a repayment mortgage and it will be a double shock to them if they hold onto the house).

These people are not home owners, they are RENTING THEIR HOMES FROM THE BANKS. This is the real elephant in the room. And there are hundreds of thousands of IO home owners with no savings plan sinking into NE - millions perhaps? Even those who make it through the recessionary rain and keep their jobs will be facing a very unhappy retirement - imagine reaching age 60-65 then getting the bank letter demanding the IO 200k loan be repaid immediately. Happy days. I have 2 siblings-in-law (with young kids) who took 100% IO mortgages at peak prices (one bought, the other had a small mortgage but MEWEd to the max) who are now in NE, and they are depressed and frustrated as they have just woken up to the prison they are residing in with no escape route other than, if lucky, social housing and bankruptcy if the jingle mail route is taken.

[Guest BAREBEAR_soon to be ALIVA]

Add this to the very generous but misguided parents that gifted their children a deposit from money mewed out of there principal house. This was one of the main indicators for me that we were in a mega bubble/ pyramid scheme.

The unraveling will be disastrous.

Isnt that sad, how they were ramping parents giving deposits to kids as if it was the new craze and even to club together with other kids and their parents money to share a place.Sometimes with people they had only just met at work.

The bank of mum and dad became an acceptable and trendy way to get your deposit but all it was was the last desperate attempts at inflating the bubble.

How pathetic we all are every 10 years or so having a mad race to not miss the boat at any cost. The parents should know better, should know its cyclical. How silly did it have to get for people to smell a rat. Look just get 10 of your mates together borrow 30k each from your parents then you can buy a 1 bed ex council flat and only have a mortgage of a million between you.

[this_prisoner_is_opting_out]

I have friends who are probably going to lose their home via mewing. They live in Fife, he was a builder, she was a stay-at-home-mum doing the occasional nursing shift. I talked to them about moving back to the UK a few years ago and she said I'd HAVE to buy, because they you just take money out of the house. So the usual story. But the thing is, they HAVEN'T been massively extravagent. They've flown Easyjet to France to stay with friends. Neither are in to clothes/drink/flash crap. I get the feeling that the money has largely been going on the bills + food.

[Guest BAREBEAR_soon to be ALIVA]

The whole thing is total irresponsibility and greed by the banks.

At one time you couldnt mew unless you could prove the money was going on improving the place and you had to have a repayment vehicle to pay off the mortgage.What was wrong with that system ?

I hope they get hit with millions handing their keys back and citing the above change of rules as the reason.

[xux42]

But the thing is, they HAVEN'T been massively extravagent. They've flown Easyjet to France to stay with friends. Neither are in to clothes/drink/flash crap. I get the feeling that the money has largely been going on the bills + food.

Obviously we don't know their full circumstances - health issues, drink, drugs or gambling might be in play.

If not, is it just the case that there was not enough headroom in their finances to buy a house, particularly if they bought/upgraded near the peak?

[Spark]

SNIP

MEWing was not the elephant in the room - eventually a MEWed up to the hilt home mortgage will be paid off, if personal circs stay positive and THERE IS A REPAYMENT VEHICLE ATTACHED TO THE MORTGAGE OR IT IS A REPAYMENT MORTGAGE.

Sadly, and shockingly, the real hefalump (I have young kids) in the room is that most of these people in debt have INTEREST ONLY MORTGAGES WITH NO REPAYMENT VEHICLE. Such mortgages never existed until the late 90's and the kind of people who hold IO mortgages for anything but a transitory period are usually debtors and incapable of saving.

SNIP

Spot on CB! IT is the IO mortgages that are going to bite people over the next 20 years or so.

Last year I had the dilemma of whether to pay off the mortgage on my home or whether to use the money to buy a BTL. I chose the latter and I don't regret that decision (for now anyway). What I found interesting is the conversation I had with my mortgage advisor when I was looking for a BTL mortgage. He automatically ASSUMED that I would be taking out an IO BTL mortgage! He seemed genuinely surprised when I said I wanted a repayment mortgage! So it does seem that lots of BTL people have also gone down the IO mortgage route on their "investments".

I'm still not doing too bad, as I have had the same tenants now for 15 months (they signed a new 12 month AST and didn't cut me down on price) and their rent easily covers the mortgage payments (I took a lifetime variable mortgage at base +0.69%).

[interestrateripoff]

These people are not home owners, they are RENTING THEIR HOMES FROM THE BANKS. This is the real elephant in the room. And there are hundreds of thousands of IO home owners with no savings plan sinking into NE - millions perhaps? Even those who make it through the recessionary rain and keep their jobs will be facing a very unhappy retirement - imagine reaching age 60-65 then getting the bank letter demanding the IO 200k loan be repaid immediately. Happy days. I have 2 siblings-in-law (with young kids) who took 100% IO mortgages at peak prices (one bought, the other had a small mortgage but MEWEd to the max) who are now in NE, and they are depressed and frustrated as they have just woken up to the prison they are residing in with no escape route other than, if lucky, social housing and bankruptcy if the jingle mail route is taken.

Anyone have the figures of how many people have IO mortgage and no repayment vehicle.

It would be nice to see some sort of graph showing how many have been taken out over the past decade.

[Richard]

... Misery for years (for those who get it - some will be so thick that they actually think they have a repayment mortgage and it will be a double shock to them if they hold onto the house)...

Annoying though it is for most people on here, such IO mortgages (particularly those of the self-cert variety) will undoubtedly emerge as a mis-selling scandal and the majority of these people will be compensated (with our money).

I'm not saying that they have been mis-sold, I'm just saying that they will have been deemed to have been mis-sold.

Edited July 1, 2009 by Richard

[helenreed]

C Beauty - great post as always.

I know many people with these ridiculous IO mortgages. Even before this crash/recession/depression they were assuming that their 3 bed semi in a nowheresville town would be worth £1-2 million pounds in a few years time. When I questioned the paying off of the original amount they all replied that it would be a doddle and they would just downsize to a 2 bed bungalow or flat. With this mindset they forgot that the 2 bedders would also have increased by the mythical percentage and therefore after paying off the IO amount they would have been lucky to purchase a garage. In the same way that sellers think their house is special and is worth more than the one down the road, these people thought their house would increase by huge amounts but that the place they would be downsizing to would not. This never made any sense.

The strain on the public services for retirees/care homes/community caring in the coming years is going to be massive.

[Greg Bowman]

Obviously we don't know their full circumstances - health issues, drink, drugs or gambling might be in play.

If not, is it just the case that there was not enough headroom in their finances to buy a house, particularly if they bought/upgraded near the peak?

Or maybe just a young couple working hard who hadn't looked at the long term, hell well educated CEO's, MP's and University Chancellors can't do that so why do we expect more from the population at large.

Perahps they just wanted a place to live and HPI screwed them - so to all you bulls out there again the question how does HPI benefit anyone??

Edited July 1, 2009 by Greg Bowman

[bearwithasorehead]

C Beauty - great post as always.

I know many people with these ridiculous IO mortgages. Even before this crash/recession/depression they were assuming that their 3 bed semi in a nowheresville town would be worth £1-2 million pounds in a few years time. When I questioned the paying off of the original amount they all replied that it would be a doddle and they would just downsize to a 2 bed bungalow or flat. With this mindset they forgot that the 2 bedders would also have increased by the mythical percentage and therefore after paying off the IO amount they would have been lucky to purchase a garage. snip

I'd like to think this is true. And when I was told about this plan by friends who've stayed on IO for about 10 years, I tried to argue the case you're putting. Their response was 'If we stay here another 20 years [to retirement] then even if house prices only average an increase of a few percent a year, the inflation will make the original loan very small indeed.'

Then I thought about my own parents' purchases: 1977, SE England, 4 bed detached for 20000. In 1998 sold for 350000, pre big increases, mind you. So in twenty years if they'd had to downsize and pay off the original 20k loan this would have been easy to do and still be able to afford a nice semi.

EDIT: apostrophe

Edited July 1, 2009 by bearwithasorehead

[dances with sheeple]

Annoying though it is for most people on here, such IO mortgages (particularly those of the self-cert variety) will undoubtedly emerge as a mis-selling scandal and the majority of these people will be compensated (with our money).

I'm not saying that they have been mis-sold, I'm just saying that they will have been deemed to have been mis-sold.

The way people with endowments etc were compensated?

[interestrateripoff]

Annoying though it is for most people on here, such IO mortgages (particularly those of the self-cert variety) will undoubtedly emerge as a mis-selling scandal and the majority of these people will be compensated (with our money).

I'm not saying that they have been mis-sold, I'm just saying that they will have been deemed to have been mis-sold.

Trouble is that opens the floodgates.

The logic of what you are saying is that if IO where mis-sold this artificially inflated the property market meaning everyone else has been forced to borrow more than needed.

I can see a mis-selling case looming whoever the consequences are far reaching as the mis-selling clearly will have a affected market asking prices.

[Si1]

The strain on the public services for retirees/care homes/community caring in the coming years is going to be massive.

the strain will be limited by our ability to pay for it

I doubt younger generations will be prepared to pay the current 40 and 50 somethings bills for them when they brought it on themselves - they'll just have to live in poverty, move into grownup childrens' spare rooms etc.

I think the suffering from this bust will fall disporportionately on those with more assets - and especially home owners, and even more esp[ecially highly leveraged "homeowners"

[Si1]

Trouble is that opens the floodgates.

The logic of what you are saying is that if IO where mis-sold this artificially inflated the property market meaning everyone else has been forced to borrow more than needed.

I can see a mis-selling case looming whoever the consequences are far reaching as the mis-selling clearly will have a affected market asking prices.

the further trouble of course is - the money just doesn't exist to compensate this.

[fluffy666]

Annoying though it is for most people on here, such IO mortgages (particularly those of the self-cert variety) will undoubtedly emerge as a mis-selling scandal and the majority of these people will be compensated (with our money).

I'm not saying that they have been mis-sold, I'm just saying that they will have been deemed to have been mis-sold.

Problem will be the sheer size of the scandal.

With endowments, even if you fully compensated people, the final bill would only be a relatively small percentage, in real terms, of the original advance, since inflation was higher in the endowment period and even the worst endowment would pay something off; so you might be looking at a shortfall of less than 10% in real terms.

Now, with low inflation and no repayment vehicle at all, the amounts involved are that much greater - and there is large scale MEW as well. The shortfall could be over 100% of the original mortgage.

[Mr Yogi]

the further trouble of course is - the money just doesn't exist to compensate this.

Well it does...

...a lot of it is sat in the bank accounts of those wise enough to have bailed out of the market at the top.

[Lord D'arcy Pew]

MEWing created a fantasy lifestyle. Take as an example a man on £20,00 PA who MEWs an extra £5,000 PA for 10 years. He has had a lifestyle 25% above his income level during those 10 years and believes he is doing well. He has been able to purchase goods and services over and above his income level and this money has filtered into the wider economy.

Then comes the crash.

He now has £50,000 of debt to service and a greatly reduced standard of living. Firstly the extra £5,000 is no longer available and secondly he is now expected to start to repay that £50,000 out of his now reduced £20,000 true income.

The last 10 years were in effect a lie. The increase in part time work and low paid work should have created a more austere society, but we have had the exact opposite.

There are a lot of people out there that have to budget for the future and also for their past. Bankruptcy will be the only way out for most.

[helenreed]

bearwithasorehead - I agree with you. However these prices could not be sustained. I think lots of people viewed their parents property 'goldmines' from 1970/80's and thought it would be the same for them. This has been a major part of the problem.

Going by the same time frame and percentage rise in price, let's assume you bought a house in 2006 for £200,000 it should therefore be worth £3.5 million in 2017. Ain't gonna happen.

This home owning culture is actually very new. Both sets of my grandparents (working class but reasonably paid jobs) spent their whole lives renting as did most people like them. My own parents did not actually buy until the late 1960's, which because of this time frame, made them mortgage free before they retired. They were in the right place at the right time.

[juvenal]

MEWing created a fantasy lifestyle. Take as an example a man on £20,00 PA who MEWs an extra £5,000 PA for 10 years. He has had a lifestyle 25% above his income level during those 10 years and believes he is doing well. He has been able to purchase goods and services over and above his income level and this money has filtered into the wider economy.

Then comes the crash.

He now has £50,000 of debt to service and a greatly reduced standard of living. Firstly the extra £5,000 is no longer available and secondly he is now expected to start to repay that £50,000 out of his now reduced £20,000 true income.

The last 10 years were in effect a lie. The increase in part time work and low paid work should have created a more austere society, but we have had the exact opposite.

There are a lot of people out there that have to budget for the future and also for their past. Bankruptcy will be the only way out for most.

So true, and so well expressed.