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Tenubracon

Moody's Warns Against Going Soft On Mortgage Borrowers In Trouble

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http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8412206/Giving-troubled-mortgage-borrowers-a-second-chance-is-storing-up-trouble-for-the-banks.html

Increased "lender forebearance" in the wake of the financial crisis whereby banks allow borrowers to extend the repayment period for their debt, switch a repayment mortgage to an interest-only product, or even allow them a holiday on interest payments, pose a risk to British banks.

In a report on the flexibility of UK banks to troubled mortgage borrowers, the ratings agency's analysts said the practice was a "credit negative" for the country's banking system.

"There is still high indebtedness on mortgages and there is potential for more borrowers to get into difficulty. As the forebearance numbers are aggregated it is hard to know the scale of the issue for any individual bank, but it is a concern," said Elisabeth Rudman, a senior credit officer at Moody's.

Moody's concerns follow the publication last week by the Financial Services Authority of its risk outlook report for the financial system, which drew attention to the issue.

FSA figures show that for every UK mortgage borrower in arrears, two are subject to some kind forebearance process to help them avoid defaulting on their debt.

The regulator said that this was a factor in keeping arrears rates down, and that combined with low interest rates and sharp falls in house prices there were "strong incentives" for banks to avoid repossessions.

Moody's fears rest on its belief that house prices, which are about 20pc below their pre-crisis peak, are likely to continue falling and as well as rising interest rates will see more borrowers get into difficulties.

"It's fair to conclude that a large number of borrowers in distress with mortgages in forebearance will re-default, while the collateral value on which the banks rely to mitigate losses will fall further.

As such, banks choosing the forebearance option may be delaying the inevitable recognition of higher losses owing to foreclosures," said the ratings agency in its report.

Banks do not publish figures on what proportion of their mortgage books could be classified as being subject to the procedure, but the worry is that their low arrears rates are hiding bigger problems.

"I don't think this is a ticking time bomb, but there are clearly problems ahead. Smaller mortgage lenders are likely to be the worst hit by this, but larger banks may also get hurt as any losses are likely to come in the midst of an economic downturn," said Ms Rudman.

The FSA has warned that efforts to help keep borrowers out of arrears are "not curing the underlying repayment issue".

Though in public senior bankers have generally sought to dampen fears, the chairman of one major British lender privately admits the UK property market is one of his biggest worries for the banking sector.

"There is a massive potential here for new losses, which many are not in any position to take," he said.

The political pressure on banks not to repossess homes, particularly given the hundreds of billions of pounds in taxpayer support given to the banking industry has been immense.

This has helped contribute to the current situation, however it has also led to fears that Britain has not acted quickly enough to reduce individual debt levels, which remain among the highest of any developed country.

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As soon as a few lenders blink and decide to cut their losses, it's the end of the charade.

It's been the case for several months now, but still the pressure builds up:

-Banks sitting on more than a few mortgages gone so bad the property they're secured on to be repossessed and sold if anything is to be recovered in the near term.

-Wages lagging prices

-Tightening lending criteria

-Cash buyers drying up

-Banks needing to strengthen balance sheets

-Interest rate rises being priced in to new deals already, existing borrowers vulnerable to hikes

It reminds me of 'The Cassandra Crossing'. We are to believe that the bridge will hold.

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I disagree.

The kidults of the UK weren't to know that signing up to a £300k 25 year mortgage on limited and unstable household incomes might not be a good idea.

Where were the warnings which said that YOUR HOME MAY BE AT RISK IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER LOAN SECURED ON IT?

oh yeh, i fogot that warning was printed, in large typeface on every document they signed.

Silly me.

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As soon as a few lenders blink and decide to cut their losses, it's the end of the charade.

It's been the case for several months now, but still the pressure builds up:

-Banks sitting on more than a few mortgages gone so bad the property they're secured on to be repossessed and sold if anything is to be recovered in the near term.

-Wages lagging prices

-Tightening lending criteria

-Cash buyers drying up

-Banks needing to strengthen balance sheets

-Interest rate rises being priced in to new deals already, existing borrowers vulnerable to hikes

It reminds me of 'The Cassandra Crossing'. We are to believe that the bridge will hold.

Yep as soon as one decides to go it's a race to dump their assets ASAP. Could IR rises kick it off? I bloody hope so!

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Printy printy!

this is STILL the largest moral hazard in history - it will result, most likely, in an inflation bail-out of the mortgage banks, and a disfunctional high street lending market for the coming decades, leading to historical house-price mega-lows in 15 years' time, an enormous entrenched bear market, when the same feedbacks that fed the bubble will tear house price valuations to shreds over a prolonged and painful period.

I expect to be renting for that entire time.

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It's going to become a game of chicken once the prices slide a bit further.

Banks will decide that they are best off foreclosing and taking what they can get for the poperty at auction or similar than restructuring finance on an asset falling in value with the high probability that the property will still be foreclosed on eventually just recouping less return at that later date.

Once the first bank starts to foreclose for the above reasons others will follow suit on the excuse 'this is now the market standard response' rather than risk being the last bank carrying the can on bad mortgages and potentially losing investor confidence because of it... regardless of the requests of government to support those falling behind in payments.

Credit spirals have a self-reinforcing uptrend and the same on the downtrend - this is the scenario i expect to play out over the next 12-18 months.

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It's going to become a game of chicken once the prices slide a bit further.

Banks will decide that they are best off foreclosing and taking what they can get for the poperty at auction or similar than restructuring finance on an asset falling in value with the high probability that the property will still be foreclosed on eventually just recouping less return at that later date.

Once the first bank starts to foreclose for the above reasons others will follow suit on the excuse 'this is now the market standard response' rather than risk being the last bank carrying the can on bad mortgages and potentially losing investor confidence because of it... regardless of the requests of government to support those falling behind in payments.

Credit spirals have a self-reinforcing uptrend and the same on the downtrend - this is the scenario i expect to play out over the next 12-18 months.

The banks' refusal to repossess has been the single biggest factor in the prevention of a crash. Once they get spooked enough, they'll happily pull the rug from under those 'hard-working homeowners'.

Edited by Tenubracon

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The banks' refusal to repossess has been the single biggest factor in the prevention of a crash. Once they get spooked enough, they'll happily pull the rug from under those 'hard-working homeowners'.

It is not the biggest factor imo. Housing benefit, which is a massive subsidy to the housing market is. It has a positive feedback effect, which means the more money in total that is paid out, the more house prices go up, and the more people need to claim it to get housing, leading to more claims and payouts for HB. It remains to be seen what the recent changes will do to this stupidity, but I fear the worst.

As long as there is housing benefit, SMI, social housing and other boondoggles from taxpayers pockets, there will be buyers of properties, particularly cash rich landlords who can make a fortune just by providing a service to taxpayers. Only when the government subsidies end will we see the much needed price correction.

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It is not the biggest factor imo. Housing benefit, which is a massive subsidy to the housing market is. It has a positive feedback effect, which means the more money in total that is paid out, the more house prices go up, and the more people need to claim it to get housing, leading to more claims and payouts for HB. It remains to be seen what the recent changes will do to this stupidity, but I fear the worst.

As long as there is housing benefit, SMI, social housing and other boondoggles from taxpayers pockets, there will be buyers of properties, particularly cash rich landlords who can make a fortune just by providing a service to taxpayers. Only when the government subsidies end will we see the much needed price correction.

Good points.

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As soon as a few lenders blink and decide to cut their losses, it's the end of the charade.

None sooner than HMG changes its "help for HO" policy. Banks are only able to forbear because of arm twisting from HMG.

Even arms of banks who were not bailed out.

Edited by matroskin

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Telegraph

Harry Wilson

29th March 2011

Efforts by banks to help out mortgage borrowers in trouble could be storing up serious problems for the financial system, according to credit rating agency Moody's.

Increased "lender forebearance" in the wake of the financial crisis whereby banks allow borrowers to extend the repayment period for their debt, switch a repayment mortgage to an interest-only product, or even allow them a holiday on interest payments, pose a risk to British banks.

In a report on the flexibility of UK banks to troubled mortgage borrowers, the ratings agency's analysts said the practice was a "credit negative" for the country's banking system.

FSA figures show that for every UK mortgage borrower in arrears, two are subject to some kind forebearance process to help them avoid defaulting on their debt

Market intervention at its finest..

Read more HERE

Edit to add: Looks like half of you have already contributed to the comments section. Either that or sentiment really is turning..

Edited by libspero

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Its in the banks interests to keep their figures under wraps. We can only guess how this figure varies from lender to lender and from area to to area. Ignoring the human cost it must be an interesting exercise deciding which properties to reprocess.

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It seems that at last the rating agencies are doing their job.

I'd love to be a fly on the wall in a bank board level meeting when this report is discussed.

direct quote from the chairman of the Yorkshire Building Society a few years ago, with a straight face - "nobody could have seen this coming"

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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