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munimula

Is There A Bubble In High-risk Lending?

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MoneyWeek article

Despite record levels of bankruptcies, UK lenders seem to be making sales at a healthy clip.

Particularly lenders who lend money to the ‘sub-prime’ – or poor credit risk - market that everyone else avoids.

In June, doorstep lender Provident Financial saw an annual increase in the number of UK customers for the first time in three years. The number of people taking out its Vanquis credit card (which charges a typical interest rate of 39.9%, more than twice the average of around 16%) is also set to hit the quarter of a million mark by the end of the year.

Fellow lender Cattles also said earlier this week that it has seen strong demand for doorstep loans.

So why the boom in lending – particularly when we’re already in so much debt?

Doorstep lender Provident Financial saw a year-on-year increase in customer numbers in June ‘after three years of reducing customer numbers’.

The amount of credit issued by the company also rose, up 1% for the five months to May 2006 compared to the same period the year before.

But bad debt costs have continued to rise too. The group said this reflected a 7% rise in the amount of money it is owed, “together with continued pressure in customers’ disposable incomes.”

Provident’s sub-prime credit card provider Vanquis now has more than 200,000 customers – and the rate of growth is accelerating. It expects to have 250,000 customers by the year-end. The group has kept control of bad debts in this division by tightening its lending criteria.

Provident isn’t the only doorstep collector enjoying the good times. Fellow lender Cattles also spoke of strong demand for doorstep loans earlier this week, saying that customers’ arrears levels and bad debts had remained stable.

It’s unsurprising that demand for credit cards and loans is increasing at the lower end of the scale. Mainstream lenders have been tightening up their criteria, leaving people with little choice but to turn to sub-prime lenders.

The other alternative, widely pushed on daytime TV, is of course to secure a loan against your house. For non-homeowners this isn’t an option – but plenty of homeowners have been going for it.

This drive to push sub-prime (or 'junk', as we like to call them) mortgages has helped keep the housing market propped up despite the sharp slowdown in growth seen in mid-2004. We wrote about this last week – you can read the piece here: How hedge funds affect house prices (http://www.moneyweek.com/file/14656/how-hedge-funds-affect-house-prices.html)

But the sub-prime boom is not the only factor behind the recent mini-revival. During 2005, the average interest rate on a UK home loan fell by more than 0.2 percentage points. The average fixed rate fell by even more, about a quarter point on average.

As David Miles and Melanie Baker at Morgan Stanley put it, this “may help to explain some of the housing market pick-up”.

But “many of these factors may now be going into reverse.” The average short-term fixed-rate loan has risen by 0.25 to 0.3 percentage points already this year – most of that within the past couple of months.

According to Miles and Baker, “the implications of even a small rise in the effective... rate are somewhat ominous”. Possession orders in England and Wales (court orders allowing lenders to repossess a house) are up “significantly”.

Courts granted 21,997 orders in the first quarter of this year, compared to 14,041 in the first quarter of 2006 - a rise of nearly 60% in just one year, and the highest number since the early 1990s.

Now just because an order is granted, that doesn’t mean that a house will be automatically repossessed. But the fact that the lender has gone to the effort of taking someone to court shows that the homeowner is in serious trouble, to say the least.

It’s not just housing debt that’s getting more expensive to service. The Morgan Stanley team point out that “quoted credit card lending rates have risen some 65 basis points [that’s 0.65 percentage points] since January 2005.”

Having to keep up payments on all that debt leaves the UK consumer much more vulnerable to interest rate shocks now than before the crash of the late 1980s.

“Household debt service as a proportion of disposable income…is at levels last seen in 1992, when the economy was in recession and base rates were significantly higher than they are today. All this has happened when rates set by the Bank of England are at a relatively low level and have not changed in almost a year.”

With global interest rates on the rise, and continued expectations that UK rates will rise sooner or later, it looks like the cost of borrowing will only get higher from here on in. That doesn’t bode well for property prices up ahead

It has to be worth remembering that whilst the BoE headline rate has not gone up, the lending and mortgage rates have on average already gone up .25 so interest rate rises are already taking place.

Edited by munimula

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A big rise in defaulting borrowers has been on the cards for a while now, so Im not at all surprised.

Im definitely hearing of more repos now. The cost of living is just too great for a lot of people as they come out of thier fixed rate mortgages (and cant get another good deal due to missed payments).

Perhaps there people will be food for landlords?

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A big rise in defaulting borrowers has been on the cards for a while now, so Im not at all surprised.

Im definitely hearing of more repos now. The cost of living is just too great for a lot of people as they come out of thier fixed rate mortgages (and cant get another good deal due to missed payments).

Perhaps there people will be food for landlords?

The dream scenario is when people come off their 2-3 year fixed deals and then find that their property is worth less, they are in NE and they have no option but to move to the banks SVR which is 2-3% higher.

That will be judgement day and IMO is 12-24 months away for many

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  • 301 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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