Treatment Strategies, Bullets And Field Services

[Bland Unsight]

About every three months I like to see how the interest-only problem is getting along.

First up, if you are a banking group who has recently laid off everyone, it may be tricking contacting your interest only customers, the good people at Ascent will provide you with Field Services, which means they go out and visit your customers for you, and this is what you find as per their marketing "Corporate News" of this July:

I reckon if you roll together the Unsure/Don't know, the Can't afford to and the Remortgage you get a new strategy - people who won't be repaying their mortgages at the end of the term and if this sample is indicative that would be 55%. Which is eye catching.

The 'bibles' on IO to the best of my knowledge remain the glorious 500+ pages of the FSA's December 2011 smash hit CP11/31 Mortgage Market Review: Proposed package of reforms and then more recently the FCA commissioned Experian report Residential interest only mortgages. As I noted on an earlier thread, When Interest Only Terms End, the Experian report showed that what banks were doing with interest only mortgages that reached the end of their term with a significant shortfall between what was owing and what the customer could pay was that they were simply extending the mortgage.

The RBS H1 2014 results are surprisingly informative, take this excerpt from page 49, (UK PBB stands for UK Personal and Business Banking, so these mortgages are UK mortgage - Ulster Bank is separately disclosed):

UK PBB

• UK PBB’s interest only mortgages require full principal repayment (a ‘bullet’ payment) at the time of maturity. Typically such loans have remaining terms of between 14 and 19 years. Customers are reminded of the need to have an adequate repayment vehicle in place during the mortgage term.
• Of the bullet loans that matured in the six months to 31 December 2013, 63% had been fully repaid by 30 June 2014. The unpaid balance totalled £48 million, of which 96% of loans continued to meet agreed payment arrangements (including balances with a term extension agreed on either a capital and interest or interest only basis). Of the £48 million unpaid balance, 66% of the loans had an indexed LTV of 70% or less with 10% above 90%. Customers may be offered an extension to the term of an interest only mortgage or a conversion of such a mortgage to a capital and interest mortgage, subject to affordability and characteristics such as their income and ultimate repayment vehicle. The majority of term extensions in UK PBB are classified as forbearance and subject to the associated higher provision cover.

Now we are just in the foothills of this coming problem, as described by this graph that I've posted times many:

The numbers themselves are monstrous. The Experian report opens up with the comforting (?) notion that by volume interest only lending comprises about 26% of total mortgage lending. However, if you look at the Barclays plc H1 2014 (page 49) Credit Risk discussion:

Exposures to interest only home loans

Interest only mortgages comprise £52.5bn (2013: £52.6bn) of the total £125bn (2013: £123bn) UK home loans portfolio. Of these, £43bn (2013: £45bn) are owner-occupied with the remaining £9bn (2013: £8bn) buy-to-let

That means by value the interest only lending is 42% of the mortgage book.

Lloyds Group plc interim results are un-illuminating (as best as I can see) but the 2013 annual report (page 149) discloses that they have on their books a cheeky £108,504 million of interest only residential mortgages (excluding BTL - and don't forget that they have a big captive BTL lender, BM Solutions). £108,504 million is £100bn - for scale the whole CML book is £1.2tn, so this is knocking on 10% of UK mortgages. The loan to value for the book is 55.2%. Fortunately, Lloyds Group can offer their over extended IO customers "treatment strategies", (emphasis added).

For existing interest only mortgages, a contact strategy is in place throughout the term of the mortgage to ensure that customers are aware of their obligation to repay the principal upon maturity of the loan. The weighted-average term to maturity of the interest only balances included in the table above is 13 years; mortgages totalling £12,003 million are due to mature in the next five years, with mortgages totalling £1,846 million due to mature in the next 12 months. Treatment strategies exist to help customers who may not be able to fully repay the full amount of principal balance at maturity. Of the residential interest only mortgages which have missed the payment of principal at the end of term, balances of £959 million remain at 31 December 2013 (£523 million at 31 December 2012). The average loan to value of these accounts is 27.3 per cent at 31 December 2013 (27.0 per cent at 31 December 2012). Of these accounts, 7.4 per cent are impaired (7.2 per cent at 31 December 2012).

There is a lot of really crappy lending out there, and a lot of so-called home owners who are in no position to put their money today where their mouth was back in the day when they inked the mortgage contract.

[Steppenpig]

I reckon if you roll together the Unsure/Don't know, the Can't afford to and the Remortgage you get a new strategy - people who won't be repaying their mortgages at the end of the term and if this sample is indicative that would be 55%. Which is eye catching.

Now we are just in the foothills of this coming problem, as described by this graph that I've posted times many:

I suspect many of the answers are just ticking the boxes, and the real figure is probably nearer 95%

I guess I haven't been paying attention, so thanks for posting again. If prices are lower in 2030 than now, it'll be carnageageddon. We really are going to be stuffed.

[Bland Unsight]

I suspect many of the answers are just ticking the boxes, and the real figure is probably nearer 95%

I guess I haven't been paying attention, so thanks for posting again. If prices are lower in 2030 than now, it'll be carnageageddon. We really are going to be stuffed.

I suspect you're right. Could IO mortgage shortfalls be a convenient home for all those pension draw downs that Osborne is facilitating? Consistent with a general determination to save the banks at all costs.

[The Knimbies who say No]

Cracking stuff bland, as you say this is the foothills of a very large issue and I guess we'll be hearing a lot more of the term 'bullet mortgages' in future.

Lloyds' doubling of problematic pedestrian LTV IO loans from yesteryear in 12 months to take this problem into the billions of pounds league must be pretty concerning, and a further £12Bn maturing in the next five years could make it 'showtime' for the issue. They have £150 million/month due for repayment this year alone, wonder what the outstanding balances will look like this time next year.

RBS's LTV profile is dynamite.

[Wurzel Of Highbridge]

I expect the banks will do exactly the same as they're doing in Ireland. They will make people pay every penny they have until death then take the house back and rent it, sell it or even just keep it empty to create an artificial shortage. Eventually the banks will own all the peoples houses because they can magic money out of thin air.

[wonderpup]

Eventually the banks will own all the peoples houses because they can magic money out of thin air.

“Let me issue and control a nation’s money and I care not who writes the laws.” Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild

[Democorruptcy]

Cracking stuff bland, as you say this is the foothills of a very large issue and I guess we'll be hearing a lot more of the term 'bullet mortgages' in future.

Lloyds' doubling of problematic pedestrian LTV IO loans from yesteryear in 12 months to take this problem into the billions of pounds league must be pretty concerning, and a further £12Bn maturing in the next five years could make it 'showtime' for the issue. They have £150 million/month due for repayment this year alone, wonder what the outstanding balances will look like this time next year.

RBS's LTV profile is dynamite.

In the opening piece it says

"Of the bullet loans that matured in the six months to 31 December 2013, 63% had been fully repaid by 30 June 2014. The unpaid balance totalled £48 million, of which 96% of loans continued to meet agreed payment arrangements (including balances with a term extension agreed on either a capital and interest or interest only basis)."

So 4% or 1 in 25 mortgages were a problem? If the same rate applied your £12bn over the next 5 years the problem is 4% of £2.4bn a year so £96m per year?

[The Knimbies who say No]

In the opening piece it says

"Of the bullet loans that matured in the six months to 31 December 2013, 63% had been fully repaid by 30 June 2014. The unpaid balance totalled £48 million, of which 96% of loans continued to meet agreed payment arrangements (including balances with a term extension agreed on either a capital and interest or interest only basis)."

So 4% or 1 in 25 mortgages were a problem? If the same rate applied your £12bn over the next 5 years the problem is 4% of £2.4bn a year so £96m per year?

I was looking at Lloyds' numbers rather than RBS' as I'm not sure if the same conclusions can be drawn.Lloyds's £1Bn of failed IO term repayments has doubled in a year, but unfortunately they don't mention the number of loans involved. RBS' look like they have much fewer issues (for now at least).

If Lloyds' expected redemptions this year, of £1.8Bn, was of a similar order to last year, which resulted in a rise of £500M of problems, it would appear that the £12Bn of upcoming redemptions in the next 5 years could add several billion to that pile.

All a bit 'back of the fag packet', admittedly.

edit added more.

Edited August 1, 2014 by Joan of The Tower

[Bland Unsight]

In the opening piece it says

"Of the bullet loans that matured in the six months to 31 December 2013, 63% had been fully repaid by 30 June 2014. The unpaid balance totalled £48 million, of which 96% of loans continued to meet agreed payment arrangements (including balances with a term extension agreed on either a capital and interest or interest only basis)."

So 4% or 1 in 25 mortgages were a problem? If the same rate applied your £12bn over the next 5 years the problem is 4% of £2.4bn a year so £96m per year?

A couple of things.

Firstly RBS don't have the same balance of IO/repayment as Lloyds and Barclays, only £24.6bn of the PBB mortgages (24.2%) is pure IO, another 7% is part IO/part capital repayment. No idea why their book is less risky in this respect, but it appears that it is.

Secondly, what is it you are calculating?

The way I read the figures is that £48m/0.37 = £129.7 million RBS IO mortgage came to the end of their term in H1 2014 and of that £129.7m, £129.7m*0.63 = £81.7 million were paid.

Hence firstly, it is 37% that are a problem. If you can't repay your mortgage when it is time to repay your mortgage, that's a problem. 4% is the people who cannot repay what they owe and cannot even keep paying the interest on what they owe.

Also you're applying RBS loan behaviour to the Lloyds book. If that was a fair thing to do, (can't see why not of we're just doing some arithmetic to get a feel for things), we're saying that 37%*£12billion = £4.4bn of IO mortgage will come to term and customers will not be able to repay their mortgage, as per its terms. On an assumed mortgage size of £100k, that's 44,000 homes. That equivalent to almost 4 years of repos at prevailing rates, just from Lloyds.

Further you can anticipate that as we move forwards that 37:63 split will move in favour of the can't pay crowd as the mix of 'naked' IOs vs under-performing endowments tilts. Additionally, for all the banks, the volumes and values of the interest only falling due will increase as we climb up the IO time-bomb mountain.

Edited August 1, 2014 by bland unsight

[Bland Unsight]

I expect the banks will do exactly the same as they're doing in Ireland. They will make people pay every penny they have until death then take the house back and rent it, sell it or even just keep it empty to create an artificial shortage. Eventually the banks will own all the peoples houses because they can magic money out of thin air.

Very possibly, but what astonishes me is that nobody seems to notice or care. Here's an FT piece, Lenders contact interest-only mortgage borrowers, which basically just regurgitates these two CML press releases, from 1 May 2014, Interest-only contact strategy is working as intended, CML reports (their title, not mine, reports bland unsight) and from 10 June 2014, Lenders have met the 2020 interest-only mortgage commitment, says CML, (again, that's their genuine title, says bland unsight).

The first press release says that the FCA has asked lenders to call up their customers and point out that they've got to pay back the principal on their mortgage at some point and the second piece says that they've done it - i.e. they've called. The FT piece says the same thing - right down to regurgitating the potentially misleading choice of the IO as a percentage of volumes in preference to IO as a percetage of value, which is non-trivial in my book.

[Democorruptcy]

So 4% or 1 in 25 mortgages were a problem? If the same rate applied your £12bn over the next 5 years the problem is 4% of £2.4bn a year so £96m per year?

I was looking at Lloyds' numbers rather than RBS' as I'm not sure if the same conclusions can be drawn.Lloyds's £1Bn of failed IO term repayments has doubled in a year, but unfortunately they don't mention the number of loans involved. RBS' look like they have much fewer issues (for now at least).

If Lloyds' expected redemptions this year, of £1.8Bn, was of a similar order to last year, which resulted in a rise of £500M of problems, it would appear that the £12Bn of upcoming redemptions in the next 5 years could add several billion to that pile.

All a bit 'back of the fag packet', admittedly.

edit added more.

Sorry my fault!

I read the "PBB stands for UK Personal and Business Banking" and thought that meant industry wide. I didn't realise it was only for RBS.

It states that Lloyds has an impairment of 7.4% so is that the figure to compare with the 4% for RBS?

[Democorruptcy]

A couple of things.

Firstly RBS don't have the same balance of IO/repayment as Lloyds and Barclays, only £24.6bn of the PBB mortgages (24.2%) is pure IO, another 7% is part IO/part capital repayment. No idea why their book is less risky in this respect, but it appears that it is.

Secondly, what is it you are calculating?

The way I read the figures is that £48m/0.37 = £129.7 million RBS IO mortgage came to the end of their term in H1 2014 and of that £129.7m, £129.7m*0.63 = £81.7 million were paid.

Hence firstly, it is 37% that are a problem. If you can't repay your mortgage when it is time to repay your mortgage, that's a problem. 4% is the people who cannot repay what they owe and cannot even keep paying the interest on what they owe.

Also you're applying RBS loan behaviour to the Lloyds book. If that was a fair thing to do, (can't see why not of we're just doing some arithmetic to get a feel for things), we're saying that 37%*£12billion = £4.4bn of IO mortgage will come to term and customers will not be able to repay their mortgage, as per its terms. On an assumed mortgage size of £100k, that's 44,000 homes. That equivalent to almost 4 years of repos at prevailing rates, just from Lloyds.

Further you can anticipate that as we move forwards that 37:63 split will move in favour of the can't pay crowd as the mix of 'naked' IOs vs under-performing endowments tilts. Additionally, for all the banks, the volumes and values of the interest only falling due will increase as we climb up the IO time-bomb mountain.

Sorry my fault!

I read the "PBB stands for UK Personal and Business Banking" and thought that meant industry wide. I didn't realise it was only for RBS.

I can see where you are getting the 37% from but don't see how that equates to 44,000 repossessions. Isn't the impairment rate 7.4% Lloyds and 4% RBS? They are obviously doing plenty of extending/pretending and Support for Mortgage Interest is no doubt being used as another taxpayer bailout to bankers.

Of course how bad the scenario plays out depends on what happens to house prices. Osborne's bubble could partly be instigated to bail these IO debtors out before their mortgages were due to mature. Most IO are in London? Since 2009 they have had a chance to sell and maybe downsize if they bought the largest house they couldn't afford!

[Bland Unsight]

Sorry my fault!

Little bit my fault; as I drafted it, it struck me that the reader might struggle to work out where the quotes were from

I can see where you are getting the 37% from but don't see how that equates to 44,000 repossessions.

I guess the whole point it that it won't. I only gave that figure as an indication of scale. I recall that back in the day if you couldn't pay your mortgage, your house was repossessed. That is no longer the fashion, but nevertheless Lloyds are anticipating outstanding mortgages which, on the assumption of a £100k average mortgage will account for 44k homes, which when they come to the end of their mortgage in the next five years Lloyds will say,"OK - now you are supposed to pay us £100k", the borrower will say "I don't got 100k", Lloyds will say "Hey, no big deal - can you keep paying the interest?" and if the answer is "Yes" then Lloyds will say "No problem, we will now wait for you to die", (just checked, a pensioner with a £100k mortgage appears to be eligible SMI forever...) It will give us no repossessions, but we could be paying the mortgage interest of out general taxation for 30 years. Hurrah!

Isn't the impairment rate 7.4% Lloyds and 4% RBS? They are obviously doing plenty of extending/pretending and Support for Mortgage Interest is no doubt being used as another taxpayer bailout to bankers.

For crying out loud, now I have to google a suitable accounting definition - this'll do... FAS 114 (don't know and don't care about the actual basis of preparation of the accounts, my technical knowledge is horribly out of date, but I assume it'll do for definition of impairment).

A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Hence you're not comparing apples with apples here.

The 7% figure is saying Lloyds saying "Of these loans that are not yet due to be paid off over the next five years, we know that 7% are so crappy that we have to admit they are crappy when we draw up our accounts" (hence there are probably provisions booked against these loans).

To the best of my understanding, the 4% figure is RBS saying "Between 31 December 2013 and 30 June 2014, of the customers with IO mortgages which came to the end of their term, 37% couldn't repay the principal. With these customers, we came to an arrangement and they remained our customers paying some kind of mortgage. Of these people between 31 December 2013 and the date of preparation of these accounts, 4% defaulted on these arrangements in some way."

Hence one (7% current impairment - Lloyds) is a forward looking indicator giving a guide to how the IOs that will fall due might be expected to behave and the other (4% not making agreed payments - RBS) is a backwards looking analysis of how the arrangements reached worked out to date.

Of course how bad the scenario plays out depends on what happens to house prices. Osborne's bubble could partly be instigated to bail these IO debtors out before their mortgages were due to mature. Most IO are in London? Since 2009 they have had a chance to sell and maybe downsize if they bought the largest house they couldn't afford!

Actually that business with the SMI that I hadn't clocked before makes it worse. They couldn't afford the house, but now we're going to enable them to have it, for free, in perpetuity, paid for out of general taxation.

We are going to respond to this mess these idiot bulls and their bankers have made by channelling money to the banks who lent the idiots the money they shouldn't have been lent so the idiots could pay more than they could afford for the houses, which they will now refuse to "give away" for less than they are worth. It's beautiful. It's almost as if when you continually bailout and reward recklessness and idiocy, what you get lots of is idiocy and recklessness.

Edited August 1, 2014 by bland unsight

[19 year mortgage 8itch]

It's beautiful. It's almost as if when you continually bailout and reward recklessness and idiocy, what you get lots of is idiocy and recklessness.

Why do you think I'm so angry?

More good work by the way. We all know its a cluster****** but no one is intent on rebalancing the situation. Its all about defusing the bomb and letting the perpetrators get away with it.

[Democorruptcy]

Little bit my fault; as I drafted it, it struck me that the reader might struggle to work out where the quotes were from

I guess the whole point it that it won't. I only gave that figure as an indication of scale. I recall that back in the day if you couldn't pay your mortgage, your house was repossessed. That is no longer the fashion, but nevertheless Lloyds are anticipating outstanding mortgages which, on the assumption of a £100k average mortgage will account for 44k homes, which when they come to the end of their mortgage in the next five years Lloyds will say,"OK - now you are supposed to pay us £100k", the borrower will say "I don't got 100k", Lloyds will say "Hey, no big deal - can you keep paying the interest?" and if the answer is "Yes" then Lloyds will say "No problem, we will now wait for you to die", (just checked, a pensioner with a £100k mortgage appears to be eligible SMI forever...) It will give us no repossessions, but we could be paying the mortgage interest of out general taxation for 30 years. Hurrah!

For crying out loud, now I have to google a suitable accounting definition - this'll do... FAS 114 (don't know and don't care about the actual basis of preparation of the accounts, my technical knowledge is horribly out of date, but I assume it'll do for definition of impairment).

Hence you're not comparing apples with apples here.

The 7% figure is saying Lloyds saying "Of these loans that are not yet due to be paid off over the next five years, we know that 7% are so crappy that we have to admit they are crappy when we draw up our accounts" (hence there are probably provisions booked against these loans).

To the best of my understanding, the 4% figure is RBS saying "Between 31 December 2013 and 30 June 2014, of the customers with IO mortgages which came to the end of their term, 37% couldn't repay the principal. With these customers, we came to an arrangement and they remained our customers paying some kind of mortgage. Of these people between 31 December 2013 and the date of preparation of these accounts, 4% defaulted on these arrangements in some way."

Hence one (7% current impairment - Lloyds) is a forward looking indicator giving a guide to how the IOs that will fall due might be expected to behave and the other (4% not making agreed payments - RBS) is a backwards looking analysis of how the arrangements reached worked out to date.

Actually that business with the SMI that I hadn't clocked before makes it worse. They couldn't afford the house, but now we're going to enable them to have it, for free, in perpetuity, paid for out of general taxation.

We are going to respond to this mess these idiot bulls and their bankers have made by channelling money to the banks who lent the idiots the money they shouldn't have been lent so the idiots could pay more that they could afford for the houses, which they will now refuse to "give away" for less than they are worth. It's beautiful. It's almost as if when you continually bailout and reward recklessness and idiocy, what you get lots of is idiocy and recklessness.

Reality is suspended and they have the "bad bank" option now. They just sweep anything they don't like the look of under the carpet (Barclays/Protium the best example!).

OK re the apples not being apples. I was only trying to get an idea of a general default rate to extrapolate a bad debt figure.

Re SMI there was some talk of the governbankment thinking about taking equity for it, now the bill is £400m a year!

http://www.thisismoney.co.uk/money/mortgageshome/article-2531080/Jobless-homeowners-face-Support-Mortage-Interest-changes.html

[Bland Unsight]

Reality is suspended and they have the "bad bank" option now. They just sweep anything they don't like the look of under the carpet (Barclays/Protium the best example!).

OK re the apples not being apples. I was only trying to get an idea of a general default rate to extrapolate a bad debt figure.

Re SMI there was some talk of the governbankment thinking about taking equity for it, now the bill is £400m a year!

http://www.thisismoney.co.uk/money/mortgageshome/article-2531080/Jobless-homeowners-face-Support-Mortage-Interest-changes.html

Indeed - reality is suspended.

Actually, looks a fair bit more complicated that I suggested. SMI eligibility require that you be in receipt of Pension Credit, being a pensioner won't do it.

This House of Commons Library paper indicates that SMI to recipients of Pension credit is falling and is anticipated to fall towards about £60m before starting to pick up slightly in 2018-2019 (be nice to know why they think it is going to pick up...) - see the table on page 20. The SMI to ESA recipients is forecast to rise considerably (£55m 2011/2013 to £156m in 2017/2018)

Still, it is all for the best. Heaven forbid that someone should have to rent, (I guess in reality the major advantage is that just like everything else it prevents supply coming to market).

How can you have a house price crash if nobody ever has to sell their house?

(Again, this is why I think that BTLers who've screwed up their maths are actually our best hope for a decent market signal regarding what people can afford to pay with the wages they actually earn. BTL to the rescue - how depressing is that! )

[Democorruptcy]

Indeed - reality is suspended.

Actually, looks a fair bit more complicated that I suggested. SMI eligibility require that you be in receipt of Pension Credit, being a pensioner won't do it.

This House of Commons Library paper indicates that SMI to recipients of Pension credit is falling and is anticipated to fall towards about £60m before starting to pick up slightly in 2018-2019 (be nice to know why they think it is going to pick up...) - see the table on page 20. The SMI to ESA recipients is forecast to rise considerably (£55m 2011/2013 to £156m in 2017/2018)

Still, it is all for the best. Heaven forbid that someone should have to rent, (I guess in reality the major advantage is that just like everything else it prevents supply coming to market).

How can you have a house price crash if nobody ever has to sell their house?

(Again, this is why I think that BTLers who've screwed up their maths are actually our best hope for a decent market signal regarding what people can afford to pay with the wages they actually earn. BTL to the rescue - how depressing is that! )

I agree the governbankment site says people can have SMI if they qualify for pension credit

If you qualify for Support for Mortgage Interest (SMI), you’ll get help paying the interest on up to £200,000 of your loan or mortgage. If you’re getting Pension Credit, this figure is £100,000.

If you’re already getting SMI and move to Pension Credit within 12 weeks of stopping your other benefits, you’ll still get help with interest on up to £200,000

https://www.gov.uk/support-for-mortgage-interest/what-youll-get

However when Osborne extended giving our taxes to bankers until 2015, he didn't mention "working age" but it was in the official documents. So either something changed after Dec 2012 or someone has conveniently (for bankers) ignored that bit:

2.65 Support for Mortgage Interest (SMI) – Temporary changes to SMI are extended until

2015-16 for working-age SMI claims. The waiting period will remain at 13 weeks and the

working-age capital limit will remain at £200,000 until 31 March 2015. (26)

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/221550/autumn_statement_2012_complete.pdf

[Bland Unsight]

Reality is suspended

...

BTW worth noting that in the 2010 Annual Report Lloyds state that conversion to IO "for up to three years" is one of the forbearance measures that will be offered to customers. 2013 they state "The Group no longer offers temporary interest only as a forbearance treatment to secured lending customers in financial difficulty, which is the primary driver of the reduction in forbearance balances in 2013." (Hilariously the neither "interest only" nor "interest-only" occur even once in the 2009 accounts or the 2008 accounts - maybe the horse on the front of the Annual Report and Accounts knew that people were converting to interest only for three years in 2008 and 2009, but if he did, he wasn't telling - the sneaky horse b@stard.)

We have to assume that the screw is going to be tightened eventually - and it looks like it is occurring very, very slowly. Those poor people, they may have to sell - and then, [sad Face], rent.

[South Lorne]

About every three months I like to see how the interest-only problem is getting along.

First up, if you are a banking group who has recently laid off everyone, it may be tricking contacting your interest only customers, the good people at Ascent will provide you with Field Services, which means they go out and visit your customers for you, and this is what you find as per their marketing "Corporate News" of this July:

I reckon if you roll together the Unsure/Don't know, the Can't afford to and the Remortgage you get a new strategy - people who won't be repaying their mortgages at the end of the term and if this sample is indicative that would be 55%. Which is eye catching.

The 'bibles' on IO to the best of my knowledge remain the glorious 500+ pages of the FSA's December 2011 smash hit CP11/31 Mortgage Market Review: Proposed package of reforms and then more recently the FCA commissioned Experian report Residential interest only mortgages. As I noted on an earlier thread, When Interest Only Terms End, the Experian report showed that what banks were doing with interest only mortgages that reached the end of their term with a significant shortfall between what was owing and what the customer could pay was that they were simply extending the mortgage.

The RBS H1 2014 results are surprisingly informative, take this excerpt from page 49, (UK PBB stands for UK Personal and Business Banking, so these mortgages are UK mortgage - Ulster Bank is separately disclosed):

Now we are just in the foothills of this coming problem, as described by this graph that I've posted times many:

The numbers themselves are monstrous. The Experian report opens up with the comforting (?) notion that by volume interest only lending comprises about 26% of total mortgage lending. However, if you look at the Barclays plc H1 2014 (page 49) Credit Risk discussion:

That means by value the interest only lending is 42% of the mortgage book.

Lloyds Group plc interim results are un-illuminating (as best as I can see) but the 2013 annual report (page 149) discloses that they have on their books a cheeky £108,504 million of interest only residential mortgages (excluding BTL - and don't forget that they have a big captive BTL lender, BM Solutions). £108,504 million is £100bn - for scale the whole CML book is £1.2tn, so this is knocking on 10% of UK mortgages. The loan to value for the book is 55.2%. Fortunately, Lloyds Group can offer their over extended IO customers "treatment strategies", (emphasis added).

There is a lot of really crappy lending out there, and a lot of so-called home owners who are in no position to put their money today where their mouth was back in the day when they inked the mortgage contract.

..Gordon Brown is responsible ..the FSA for what they were worth reported to him...and this lot ..the now lot ..have done nothing to improve the situation ..any interest rate rise will sink the 48% and many more...and the banks...and the country....as no original thought has been uttered ...

[little fish]

Indeed - reality is suspended.

Actually, looks a fair bit more complicated that I suggested. SMI eligibility require that you be in receipt of Pension Credit, being a pensioner won't do it.

This House of Commons Library paper indicates that SMI to recipients of Pension credit is falling and is anticipated to fall towards about £60m before starting to pick up slightly in 2018-2019 (be nice to know why they think it is going to pick up...) - see the table on page 20. The SMI to ESA recipients is forecast to rise considerably (£55m 2011/2013 to £156m in 2017/2018)

Still, it is all for the best. Heaven forbid that someone should have to rent, (I guess in reality the major advantage is that just like everything else it prevents supply coming to market).

How can you have a house price crash if nobody ever has to sell their house?

(Again, this is why I think that BTLers who've screwed up their maths are actually our best hope for a decent market signal regarding what people can afford to pay with the wages they actually earn. BTL to the rescue - how depressing is that! )

I think it gets worse too

If you work and save towards a pension it is likely that from next year you will be expected to release some of it to clear an existing IO mortgage but if you qualify for pension credit you just get a free house for life?

The Building Societies response to MMR – p17/18. Sounds to me like they are advocating IO as an alternative to renting.

113. The private rented sector can provide tenants with good quality accommodation, in

areas that they wish to live at a price that they can afford. However, with most operating on a

6 to 12 month assured shorthold tenancy, this can mean frequent moves and upheaval in

finding new accommodation. For a proportion of the market this works, but for some, such as

those with families, the lack of secure tenure can be very stressful.

114. Therefore in order to obtain stability and purchase a home in the area the individual

wishes to live, at a level they can afford, why should interest only not be an option? We

recognise this will not work for all and it is not necessarily a decision for the regulator.

However, in our view the Government has a responsibility to ensure that appropriate housing

is available, that meets the demand of the population, creating vibrant and cohesive

communities. Further work must be undertaken to provide people with greater security of

tenure if home ownership is not attainable.

http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0CC0QFjAC&url=http%3A%2F%2Fwww.bsa.org.uk%2Fbsa%2Fmedia%2Fmigrateddocuments%2Fmortgages%2Fcp_11_31_bsa_response%2F&ei=3hHcU7f7Fe2e7Aa6iICQDg&usg=AFQjCNHQiySXWpyCqZ_DYR5MwWbM1eI4cg&sig2=DSX-MzAMpYBhhoomsWdNhA&bvm=bv.72197243,d.ZGU

[Bland Unsight]

I think it gets worse too

...

No, you're looking at a battle they lost. That was their response to CP11/31 which they issued May 2012.

You're looking at this:

And to the IO crackhead BSA, the regulator said no.

I'd never bothered to look at the detail of the VI responses to the MMR consultation papers, and I'm kind of glad, because it all bothers me a lot less now that we know that the reforms went through and that IO disappeared (in the world of people with median earnings and real life deposits trying to buy everyday houses).

One of the questions that I puzzled at for a long time but think that I finally get is why, in the face of so much pressure from the financial industry, did the regulatory authority ram the end of IO down their necks, and the answer that I'm working with for the time being is that the interests of the banks and governments are sometimes aligned but not always aligned. The economy is ripe with paths where these differences manifest. Take interest only. If the banking sector can get people to pay a ridiculous proportion of their lifetime earnings for housing - that's all good for the banks. But it is not all good for the government. The political classes and their technocrats know that in some sense 'they' will still be in power in thirty or forty years time, so how does it solve their problem to have a non-trivial swathe of a cohort of pensioners with no ability to pay any rent and nowhere to live rent free. In the longer run, the governmet has to engage with the problem that a citizen's lifetime earnings must be able to purchase their lifetime housing needs. The price has to be right. The BSA as presently constituted have no interest in this reality. The more the smucks can be gulled into paying, the better. There is an inherent conflict between the government and the banks. This is obscured during a massive credit boom, and its fallout, because in the expansion phase we have a time wherein, for a suitably idiotic and myopic group of leaders in the financial community and the political class, their interests appear to align, and during the panic phase both the government and the banks don't want people to panic.

Time moves slowly when interest rates are low.

Edited August 2, 2014 by bland unsight

[dances with sheeple]

No, you're looking at a battle they lost. That was their response to CP11/31 which they issued May 2012.

You're looking at this:

And to the IO crackhead BSA, the regulator said no.

I'd never bothered to look at the detail of the VI responses to the MMR consultation papers, and I'm kind of glad, because it all bothers me a lot less now that we know that the reforms went through and that IO disappeared (in the world of people with median earnings and real life deposits trying to buy everyday houses).

One of the questions that I puzzled at for a long time but think that I finally get is why, in the face of so much pressure from the financial industry, did the regulatory authority ram the end of IO down their necks, and the answer that I'm working with for the time being is that the interests of the banks and governments are sometimes aligned but not always aligned. The economy is ripe with paths where these differences manifest. Take interest only. If the banking sector can get people to pay a ridiculous proportion of their lifetime earnings for housing - that's all good for the banks. But it is not all good for the government. The political classes and their technocrats know that in some sense 'they' will still be in power in thirty or forty years time, so how does it solve their problem to have a non-trivial swathe of a cohort of pensioners with no ability to pay any rent and nowhere to live rent free. In the longer run, the governmet has to engage with the problem that a citizen's lifetime earnings must be able to purchase their lifetime housing needs. The price has to be right. The BSA as presently constituted have no interest in this reality. The more the smucks can be gulled into paying, the better. There is an inherent conflict between the government and the banks. This is obscured during a massive credit boom, and its fallout, because in the expansion phase we have a time wherein, for a suitably idiotic and myopic group of leaders in the financial community and the political class, their interests appear to align, and during the panic phase both the government and the banks don't want people to panic.

Time moves slowly when interest rates are low.

If the sheeple ever "wake up", then "They" are truly ******ed?

Edited August 2, 2014 by dances with sheeple

[dances with sheeple]

http://ts1.mm.bing.net/th?&id=HN.608014305299204491&w=300&h=300&c=0&pid=1.9&rs=0&p=0

Edited August 2, 2014 by dances with sheeple

[Snugglybear]

Indeed - reality is suspended.

Actually, looks a fair bit more complicated that I suggested. SMI eligibility require that you be in receipt of Pension Credit, being a pensioner won't do it.

This House of Commons Library paper indicates that SMI to recipients of Pension credit is falling and is anticipated to fall towards about £60m before starting to pick up slightly in 2018-2019 (be nice to know why they think it is going to pick up...) - see the table on page 20. The SMI to ESA recipients is forecast to rise considerably (£55m 2011/2013 to £156m in 2017/2018)

Still, it is all for the best. Heaven forbid that someone should have to rent, (I guess in reality the major advantage is that just like everything else it prevents supply coming to market).

How can you have a house price crash if nobody ever has to sell their house?

(Again, this is why I think that BTLers who've screwed up their maths are actually our best hope for a decent market signal regarding what people can afford to pay with the wages they actually earn. BTL to the rescue - how depressing is that! )

Also anyone reaching pension age at or after April 2016 will get the new flat-rate state pension and won't get pension credit. Only those who don't have sufficient qualifying years of NI contributions will get pension credit, and only then if they have no other income or savings. My feeling is that very few people in those circumstances will have been able to get a mortgage and keep servicing it until retirement age, anyway. So after April 2016 the number of pensioners eligible for SMI may well start falling further.

[ARIMA]

Certainly points to a lot more equity release/ roll up mortgages consuming equity until the inhabitant expires. Assuming there is sufficient equity to consume by then. One question is whether the likes of lloyds will start rolling customers on to these deals by the back door or whether they will force the inhabitant to go to a specialist provider and remortgage (presently the high street banks don't play in ER).