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Return Of The Interest-Only Mortgage: Fierce Competition Among Lenders Is Making It Easier To Take Out Risky Loans

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http://www.dailymail.co.uk/money/mortgageshome/article-3141560/Return-mortgage-Fierce-competition-lenders-making-easier-risky-loans.html

  • Loans were blamed for inflating housing market ahead of the 2008 crisis
  • New deals means borrower can clear debt when they sell the property
  • Mortgage approvals in Britain reached a 14-month high in May

Interest-only mortgages are becoming easier to take out as a result of fierce competition among lenders.

The potentially-risky loans almost disappeared altogether in 2008 after being blamed for inflating the housing market ahead of the financial crisis.

But lenders have begun introducing deals allowing borrowers to take out an interest-only loan with a deposit of 25 per cent and pay it off when they sell the property, the Times reports.

Interest-only deals, where the borrower only pays off the interest each month and not the capital, were immensely popular prior to the financial crisis because they were cheaper in the short-term.

However they carry significantly higher risks in the long-term as homeowners could see a large hike in their monthly payments down the road.

In 2007 interest-only loans accounted for 33 per cent of the mortgage market but by last year that had fallen to just three per cent according to the council of mortgage lenders.

Yes when you make that 100% certain profit you can sell the property and pay the lender back. Absolutely nothing will go wrong. Fill your boots and make easy money.

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What is the FCA and BOE doing? Waiting for another disaster? Sleeping?

I thought IO mortgages were banned for owner occupier properties.

Edited by Fairyland

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What is the FCA and BOE doing? Waiting for another disaster? Sleeping?

I thought IO mortgages were banned for owner occupier properties.

From the FCA's guide to the Mortgage Market Review:

For lenders
  • Lenders are fully responsible for assessing whether the customer can afford the loan, and they have to verify the customer's income. They can still choose to use intermediaries in this process, but lenders remain responsible.
  • Lenders are still allowed to grant interest-only loans, but only where there is a credible strategy for repaying the capital.
  • There are transitional provisions in the MMR that allow lenders to provide a new mortgage or deal to customers with existing loans who may not meet the new MMR requirements for the loan. The borrowing is not able to exceed the amount of their current loan, unless funding is required for essential repairs. The decision on whether or not to lend in these cases remains with the lender.

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You could summarise all the new MMR rules as just "don't be an idiot"

The idea of idiot is ambiguous in contemporary discourse. Some would have you believe that an idiot is one who refuses to get up to their eyeballs in debt to buy a crap house. Others would have you believe the converse.

Fortunately the MMR rules are drawn clearly enough via the key consultation papers that we can assign with confidence another more robust interpretation; henceforth if you take out a mortgage to buy a house, you will actually need to buy the f**king house, and not merely rent it from the bank over the short term in the hope that over the long term house price inflation will magically buy it for you.

The long and short of MMR is that it is a techocratic assertion that a Ponzi scheme is a Ponzi scheme and it's not practical over the medium term to have an oversized banking sector pouring about 70% of new credit money into housing and 50% of that in on an interest only basis. There's a reason that the idea of housing Ponzi resonates, which is that it is correct. MMR closed the Ponzi to new entrants. Guess what happens next.

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Pretty steep qualification, and nice chunk of equity to help reassure lenders into HPC that they won't lose out.

Customer must also have £300,000 of equity in the property, after the interest-only element is taken into account.

I've got nothing against IO mortgages when used responsibly.

Barrister contact of my brothers bought in London in 2012 with IO from Lloyds, just before a tightening up of IO. Barrister is self-employed, and no regular income... can be months and months before fees come in for chargeable hours, and IO right way to go for that. Not certain of availability now (IO) but tighter than for a long time (other than BTL it seems) for new buyers.

Forgot to explain this; here the borrower needed an IO mortgage to (overpay imo) in buying the house (into the wider reflation, because other mortgages not suitable for their irregular income.

Their responsible approach though is in good months, when money comes in and taxes paid, to pay lumps off their mortgage. Not leave it at 25 years just purely on IO payments.

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You could summarise all the new MMR rules as just "don't be an idiot"

You've not looked at a bank's balance sheet circa 2000-2008?

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loosening at the top, is the first step on a path of loosening.

If competition is driving this effect as described in the OP, then again, we see bankers who see nothingbut price being the criteria for lending, not quality, not need, not sensible, just volume through price..

In truth, one £150K mortgage is identical to any other £150K advance, its just the price that is in question.

This simple truth is why Banking is, and needs to be, the most regulated business on the Earth.

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What have the lenders got to lose?......no risk and high income from fees called interest whilst stability and hpi is maintained...... Any slight value falling trend whereby their LTV risk is raised and they start owning more of a falling asset charges and demand of lump sums to reduce their risk...margin call.

It is a ponzi.

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I love the way that they keep inter-mating that the bank is "responsible" what a joke the MMR is. All advances should be covered not the 85% at the moment, the BOE are saying that 15% of lending can be irresponsible.

LBC spent an hour the other day on how "ridiculous" house prices are. The out come was that things could be solved if banks could just go back to 100% mortgages. :wacko:

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Why are lenders getting more and more desperate? Why are lending IRs falling? We're now in the 3rd year of a recovery. Everytime I hear the government talk, I hear about record employment, low unemployment, the government doing the right thing for hard working families. Yet....the banks are acting like the opposite is going on - that we're becoming even too poor for record low lending rates, and new record lows have to be created.

This comment may contain trace elements of sarcasm

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Why are lenders getting more and more desperate? Why are lending IRs falling? We're now in the 3rd year of a recovery. Everytime I hear the government talk, I hear about record employment, low unemployment, the government doing the right thing for hard working families. Yet....the banks are acting like the opposite is going on - that we're becoming even too poor for record low lending rates, and new record lows have to be created.

This comment may contain trace elements of sarcasm

Interest rates are neither here nor there relevant to the size of the debt that is now required to buy even a dosshouse......they are dependant on growing wages or growing capital deposits possibly from inhertitance......when many inheritances are now being used to finance old age and pensions.

rather a 7% interest rate borrowing £50k than a 1.5% interest rate borrowing £400k for the same property......

http://www.thisismoney.co.uk/money/mortgageshome/article-1633400/Mortgage-calculator-Compare-true-cost-rates-fees.html

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Surely by imposing the MMR restrictions, that is just the government's way of underlining the fact that it will bail out banks again if anything goes wrong?

The banker will say - it is your fault Mr Government, if you had let us lend as we wished, then the returns we would have been able to earn would have been larger and we would be in brilliant shape. Because you told us what we could lend and to who and it has all gone wrong, its your fault, not ours. Now, get the taxpayers' cheque book out for another recapitalisation and let us have another decade where borrow from the BoE at 0.5% please. Or else.

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Surely by imposing the MMR restrictions, that is just the government's way of underlining the fact that it will bail out banks again if anything goes wrong?

...

I think the opposite is the case. Previous to the 2009 Banking Act, when in 2008 all the banks looked like they might fail at the same time and with no practical resolution regime in place the state was caught with its trousers down. The people who mattered in the private banks had presumably seen this coming and presumably it informed their conduct (moral hazard). Hence in 2008 you either bailed out the banks or you nationalised them. In this context a bailout was inevitable.

However, my reading of the present conduct by the Bank of England and the Treasury is that having taken steps to get the banks better capitalised, they now pretty much want one of the larger banks to fail so that they can road test their resolution regime and sell off bits of the corpse to challenger banks and give them a leg up, reducing the concentration of market share in a small number of crap hands that ought to have been killed off in 2008 but were not. My perspective is that policy is seeking to return market discipline to the financial sector, and the acid test of that having come to pass is a decent size bank failing and being allowed to fail and the resolution framework handling the corpse as intended. It didn't exactly capture the public imagination but the 2009 failure of Dunfermline was a road test of the resolution framework with a minnow.

Edited by bland unsight

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I think the opposite is the case. Previous to the 2009 Banking Act, when in 2008 all the banks looked like they might fail at the same time and with no practical resolution regime in place the state was caught with its trousers down. The people who mattered in the private banks had presumably seen this coming and presumably it informed their conduct (moral hazard). Hence in 2008 you either bailed out the banks or you nationalised them. In this context a bailout was inevitable.

However, my reading of the present conduct by the Bank of England and the Treasury is that having taken steps to get the banks better capitalised, they now pretty much want one of the larger banks to fail so that they can road test their resolution regime and sell off bits of the corpse to challenger banks and give them a leg up, reducing the concentration of market share in a small number of crap hands that ought to have been killed off in 2008 but were not. My perspective is that policy is seeking to return market discipline to the financial sector, and the acid test of that having come to pass is a decent size bank failing and being allowed to fail and the resolution framework handling the corpse as intended. It didn't exactly capture the public imagination but the 2009 failure of Dunfermline was a road test of the resolution framework with a minnow.

I hope you are right and I hope that one of the big banks is allowed to fail if it is skint

That said, I think they are probably all as close to the edge as each other and that a situation where one goes skint might mean that so many are skint that the system 'needs' another bailout

Ideally it won't come to the point where either scenario plays out

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No it doesn't Count.

'Gents, we are not in disarray! We are falling back. And all the time, their supply lines get longer. The home-owners, buyers and investors must be taken to the point where they start to think about pulling back, then present them with the possibility - the seeming possibility - of a knock-out blow. But it won't knock us out - it knocks them out.'

Most of the renters looked at all the territory they had lost, and the fraction they had left, and thought it was all over for them. The HPC senior members looked at their relatively unscathed divisions, fresh units, crack squads, all positioned just where they should be, knives laid against and inside the body of an over-extended, worn-out enemy, just ready to cut...

[Tweaked from Use of Weapons.]

Very few in a position to meet the criteria, and they're just 'victims' ('protect protect' them as so many hpcers want to do) as market turns down.

Snippets from a long article (but at no part grasps that HPC could be coming to correct things). Some other bits re some lenders offering x5 but makes no difference to main info, imo. Draw the BTLers in / big LTVs. (Banks getting ever stronger for HPC.) It's not earning anything in the bank.

June 26 2015

Banks have lowered the amount they will lend based on people’s salaries so much over the past year that the average British worker hoping to put down a 10 per cent deposit on an average priced home would be more than £100,000 short, an investigation by Times Money can reveal.

In October last year, the Bank of England introduced new rules restricting the amount of mortgages lenders could offer at loan-to-income ratios of 4.5 times or above. A loan-to-income ratio — or maximum income multiple — dictates how much a buyer is borrowing relative to their annual income. For example, a borrower who earns £50,000 a year who is offered a loan-to-income ratio of four can borrow £200,000.

Over the past 12 months most lenders have reduced the amount they will lend based on a borrower’s income. For example, in July, Santander reduced their maximum income multiple from six times a borrower’s income to five. For first-time buyers the bank’s new cap is even lower, at four and a half times their income.

..Money asked all the major banks and building societies to submit their maximum income multiples. ...The average of all the respondents was four and half times a borrower’s salary.

In London, where the average house price is now £493,000, and the average annual wage is £35,069, according to the latest ONS data, the shortfall that borrowers would need to make up after their deposit and loan would be £285,890.

..“Even borrowers taking Help to Buy mortgages often have the amount they can borrow restricted when compared to other customers. Until house prices come down buyers will need more generous income multiples, otherwise they will be forced to rent or rely on the Bank of Mum and Dad.”

Lenders meanwhile continue to court landlords. There are now almost 700 buy-to-let loans on the market compared with fewer than 200 mortgages available for first-time buyers.

http://www.thetimes.co.uk/tto/money/mortgages/article4481168.ece

Once the BTL boom has played out... we could quickly go back to a cold market, with very few left in position to borrow... knives laid against and inside the body of an over-extended, worn-out enemy, just ready to cut.

Shipside called it too early.. secondary BTL boom - only question is how long does that run for.

Rightmove Index June 2014 Shipside notes: “Many serious buyers who were waiting in the wings have now bought and moved in, taking a slug out of the pent-up demand for a few years to come, and the consequent chatter on the street is that quality buyers are now thinner on the ground. The next wave of buyers may have less motivation or ability to buy and sellers are going to have to be sensitive to their local market and not pitch their asking prices too high as choosy buyers will not arrange to come and visit.”
Edited by Venger

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...

That said, I think they are probably all as close to the edge as each other and that a situation where one goes skint might mean that so many are skint that the system 'needs' another bailout

...

I think that another thing that is easy to overlook is that a significant contributory factor in the dislocation in 2008 was the bank's funding practices, with Northern Rock being the most egregious example. Because of an over-reliance on a the assumption of a bottomless well of wholesale money market funding that would supposedly always be open when that market closed you had a the banks couldn't meet their obligations to their creditors as they fell due. The banks needed to pay out money when demands for its return were made, but nobody would lend them money so that they could do this - they wouldn't even lend each other money. That problem is largely solved as the banks rely now much more of customer deposits which are less flighty and supported by the Financial Services Compensation Scheme, so there is no reason for small retail depositors to hit the panic button. In the moment of crisis, this problem was handled first via things like the Special Liquidity Scheme, where the Bank of England exchange its gilts for crap bank MBS so the crap bank could obtain loans using the gilts as security, loans that would only have been available at much more expensive rates if the MBS were offered as security directly by the private bank, (if they were available at all).

A separate but related problem for the banks was that because they had so little of their own skin in the game, i.e. they were under-capitalised, that a small movement in the booked value of their assets could wipe them out. For this reason the crap banks really couldn't start calling in crap mortgages and trying to sell off the crap houses because as they booked the attendant losses it would have burned through their capital leaving them insolvent on the books, i.e. it can't in principle repay its depositors because the assets it holds (loans) are worth less than its obligations to its creditors (the depositor's deposits).

In 2008 both of these problems manifested at the same time for the larger part of the UK banking sector in a regulatory environment predicated on the assumption that neither of these things could ever happen at all, because the banks had their own best interest at heart etc. (insert your preferred brand of neo-liberal nonsense here, ;) ).

Whilst I understand cynicism and, to an extent, even despair, and I know that some posters would have you believe that the run down from 2007 to 2009 was the bust, I think the evidence supports an alternative perspective, which is that in 2009 the bust was intentionally forestalled, i.e. delayed, because it was blindingly obvious to policy makers that the banks couldn't take it and it would result in a nationalised banking sector presiding over the chaotic unravelling of a monster boom. What we are enduring is not a new normal, it's a gradual return to normal where normal is the moronic UK boom-bust cycle. Viewed from this alternative perspective, because the bust wasn't allowed to run to its natural conclusion in 2009 you'll know we are actually back to normal when we have a massive bust.

I honestly thought it would be along by now. Osborne was willing to stoke his nice little boom and hoi polloi went for that bullsh!t like catnip, but you can't pay off an interest-only mortgage with a little bit of smoke and mirrors and there's an awful lot of 'pure' interest-only, (i.e. without repayment plan) out there - a totally novel component of UK mortgage financing. Anyone who thinks that the 1997-2008 boom is somehow behind us is, IMPO, smoking crack.

Edited by bland unsight

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Viewed from this alternative perspective, because the bust wasn't allowed to run to its natural conclusion in 2009 you'll know we are actually back to normal when we have a massive bust.

I agree. The crash didn't happen - it wasn't cleansed out. it's still in the system. It's still in the bloodstream. We still have the disease, but we pretend we don't have it. The denial is strong. We limp along with a fever pretending we're well, and when someone says "if you're well, then you can surely jog 200 metres, right?" - but we can't. We say it's not time. We say that it's been 6 years since we did a light jog, but you know - we're recovering so well! We've been recovering for 3 years. One day.....one fine day.....perhaps decades from now....we'll attempt that light jog.

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I agree. The crash didn't happen - it wasn't cleansed out. it's still in the system. It's still in the bloodstream. We still have the disease, but we pretend we don't have it. The denial is strong. We limp along with a fever pretending we're well, and when someone says "if you're well, then you can surely jog 200 metres, right?" - but we can't. We say it's not time. We say that it's been 6 years since we did a light jog, but you know - we're recovering so well! We've been recovering for 3 years. One day.....one fine day.....perhaps decades from now....we'll attempt that light jog.

Those sat on fortunes in HPI, and those chasing HPI at all levels, are the 'we pretend'. So they pretend. Not I.

Shunt it all clear and kiss it better and protect the HPI by expanding the national balance sheet. Woo. Only fresh debt volume (by banks to lenders) can get to clearing that national balance sheet down, and I suspect there's one thing required for that.

Some limp along in rented. Some absolute paradising it in houses worth fortunes bought ages ago, even not so long ago, vs chronic HPI.

Relax though. For many prices are seen as good value. And nobody died. Get back to renting and watch ever more HPI. Oh, and set up a compensation scheme for all mortgage borrowers so they don't take any future losses, as another current hpc theme. All great.

I didnt mention anything about "my belief" so Id prefer you stuck to realities too. Ok?

CBs are appointed by govt. They are answerable to govt. When they buy domestic assets they are in govt denominated currencies.

Bank of England bought £375,000,000,000 of UK govt sterling denominated bonds. Nobody died.

Of course a CB can be operationally independent in terms of setting the policy rate, but it does so 1. within a govt mandate and 2. in full cogniscence of fiscal policy.

If for instance, foreign holders of gilts decided to sell every last one of them (presumably because they were no longer running trade surpluses v UK or whatever) BoE could/would buy them. Thats why a central bank exists after all - as buyer of last resort for govt bonds. If they refused govt would simply force them. As I said above, of course that would likely have currency implications in the short run (see Japan), but that is a different issue. One which is clearly becoming more significant as we go forward.

Indeed, but is this a question of death? Or about ensuring market participants bear consequences of their decisions without any artificial fiddling that makes the final reckoning much harder and destroying the standards of living of large swathes of the populace along the whole process. No, you said nothing about your beliefs explicitly indeed, but I can read between the lines. That "nobody died" argument is another one from that league where bureaucrats can make arbitrary decisions of whom needs bailing out at the expense of whom and for what underlying purpose...

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