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> Commentary by Matthew Lynn

> Aug. 8 (Bloomberg) -- We are now all familiar with the

> damage that can be done to financial markets by a subprime

> lending crisis. Global equity markets have taken a battering

> recently because of concerns about U.S. home mortgages.

> So which country is next?

> The U.K. has had a property bubble every bit as crazy as the

> U.S.'s. Valuations were stretched, and lending criteria loosened.

> And now arrears are starting to rocket, even while the economy

> remains healthy.

> Not only does the U.K. face its own subprime crisis, it

> could be far worse than in the U.S.

> The latest figures on debts and mortgage arrears in the U.K.

> certainly make grim reading. Households ``are getting into more

> trouble when it comes to their mortgages,'' London-based

> consulting firm Capital Economics Ltd. said in a note to

> investors. ``With higher interest rates yet to have their full

> effect, mortgage arrears are likely to rise further, while

> unsecured bad debt might start to rise again too.''

> The signs of trouble ahead can be seen in the number of

> homes now being repossessed because their owners can't keep up

> the payments. According to the Council of Mortgage Lenders,

> lenders foreclosed on 14,000 properties in the first six months

> of the year, 30 percent more than in the year-earlier period.

> That reflected ``the impact of an increasing amount of subprime

> lending within the overall market,'' the council said in a

> statement on the figures.

>

> Britons in Debt

>

> Arrears aren't in great shape either. An estimated 125,100

> households are behind with their mortgage payments, about 1

> percent of the total, according to the council. Home owners

> behind with the payments will have their homes repossessed a few

> months down the line, unless their finances improve.

> The wider picture of indebtedness isn't much more

> comforting. The British are deeper in the red than any other

> major economy. According to data from the National Institute of

> Economic and Social Research in London, the ratio of household

> debt to personal income is 1.62 in the U.K., compared with 1.42

> in the U.S., 1.36 in Japan and 1.09 in Germany.

> The U.K. is now facing a subprime crisis on a similar scale

> to the U.S. As anyone who has taken out a mortgage in Britain

> will know, banks shovel out money without asking many questions.

> A review by the U.K.'s Financial Services Authority last month

> criticized reckless lending in the subprime sector, which has, it

> said, ``resulted in the approval of potentially unaffordable

> mortgages.''

>

> No Proof of Income

>

> The British market doesn't fall neatly into ``prime'' and

> ``subprime'' categories. Most of the mainstream lenders offer so-

> called self-certified mortgages, which require no proof of

> income. Plenty of prime borrowers -- meaning people who haven't

> defaulted on a loan yet -- are likely to take out mortgages that

> will be hard to make the payments on.

> The U.K. subprime crisis may be a lot nastier than the U.S

> one. Here's why.

> First, despite the mounting evidence that people can't

> afford them, house prices continue to soar. The National Housing

> Federation predicted this week that British house prices will

> rise 40 percent in the next five years, taking the average value

> of a home to 302,400 pounds ($618,000) by 2012.

> The average British home already costs 11 times the average

> local salary, and that figure continues to increase. It is driven

> mainly by the U.K.'s small geographic size, high levels of

> immigration, and very low levels of house building. People have

> to live somewhere -- a home, after all, isn't an optional item

> for most of us.

> The net result is that even as payment problems mount,

> people will carry on taking out bigger mortgages. What choice do

> they have?

>

> Rate Differences

>

> Next, U.S. interest rates may have reached their peak and

> could soon fall. In the U.K., that isn't the case. The Bank of

> England is likely to raise borrowing costs at least once more to

> 6 percent. If the housing market and general inflation don't show

> any sign of responding to that treatment, interest rates could go

> higher still. That won't help borrowers already hard-pressed to

> make their payments.

> There should be two self-correcting mechanisms for fixing a

> subprime crisis in the housing market. House prices should gently

> fall, making properties more affordable, and reducing the size of

> loans. And interest rates should stabilize or fall, making the

> payments on those loans easier to maintain.

> Neither seems to apply in the U.K.

> Instead, interest rates are rising and so are house prices.

> The result is that thousands of families are left in a vulnerable

> position -- and so are the banks that have lent them money (not

> to mention the investors who have bought those loans as they have

> been sold on).

>

> Just Walk Away

>

> While the property market rises, everyone will be safe. If

> your house is worth more than your mortgage, you will be

> desperate to hold on to it. If you get into trouble, you can

> always sell it, repay the loan, and move somewhere cheaper.

> Yet, as the U.S. has discovered, if house prices start to

> fall, that arithmetic changes. If you are in trouble with your

> mortgage, you can't pay it off by selling. There is little

> incentive to keep up the payments. Why not just walk away, and

> hand the keys and the problems over to the mortgage company?

> Britain hasn't reached that point yet. But if it does, the

> mess could be even worse than in the U.S.

>

> (Matthew Lynn is a Bloomberg News columnist. The opinions

> expressed are his own. Click {LETT <GO>} to comment on this

> column and write a letter to the editor.)

>

> --Editor: Henry (jws)

>

> To contact the writer of this column:

> Matthew Lynn in London at +44-20-330-7171 or

> matthewlynn@bloomberg.net.

>

> To contact the editor responsible for this column:

> James Greiff at +1-212-617-5801 or jgreiff@bloomberg.net.

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...the ratio of household debt to personal income is 1.62 in the U.K., compared with 1.42 in the U.S., 1.36 in Japan and 1.09 in Germany.

Thanks - good article.

I am surprised at the debt level in Japan - I wonder if these figures only show liabilities and do not reflect high asset levels (savings rates) in Japan, for example.

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Guest DissipatedYouthIsValuable
bless. He thinks britons can just 'hand in the keys' like in the States.

Is that not the case?

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> Commentary by Matthew Lynn

> Aug. 8 (Bloomberg) --

> The British market doesn't fall neatly into ``prime'' and

> ``subprime'' categories. Most of the mainstream lenders offer so-

> called self-certified mortgages, which require no proof of

> income. Plenty of prime borrowers -- meaning people who haven't

> defaulted on a loan yet -- are likely to take out mortgages that

> will be hard to make the payments on.

> The U.K. subprime crisis may be a lot nastier than the U.S

> one. Here's why.

....the American market does not fall neatly into Prime and Sub Prime either ....look at their Alt A where lines are being pulled, currenty.....this is a similar product to our Self Cert..... :o:o:o

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bless. He thinks britons can just 'hand in the keys' like in the States.

They can. Last time they did. Legally if the house doesn't cover the debt they're still liable for the balance but I have friends who did this in 1990 ish and all they got was one phone call a couple of years later hinting they might like to hand over some money to which they said f*ck off. Basically the balance was written off.

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Thanks - good article.

I am surprised at the debt level in Japan - I wonder if these figures only show liabilities and do not reflect high asset levels (savings rates) in Japan, for example.

Well it omitts one importnat difference between the US and the UK market. Namely in the US you can walk away with no further consequences part from yoru credit rating is up the creek. In the UK the lender will pursue the debt until the day you die. Unless of course you declare yourself bankrupt. Sounds like that could be the answer for many especially now the laws on easier on these people. Roll on the cash society.

sorry people took a phone call between starting and finshing the post so some got there first.

Another thing in the US The Local authority takes a charge on any outstanding debt on a house that must be cleared before teh house is sold. In teh UK not teh case.

Edited by vfr

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They can. Last time they did. Legally if the house doesn't cover the debt they're still liable for the balance but I have friends who did this in 1990 ish and all they got was one phone call a couple of years later hinting they might like to hand over some money to which they said f*ck off. Basically the balance was written off.

they got lucky then.

For every one of your theiving friends, there were 99 honest people who stood up to their obligations and made efforts to pay the debt back. And another 100 who were chased thru the courts for it and bankrupted. The law is pretty clear on this topic, so argue with the courts, not me.

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...Namely in the US you can walk away with no further consequences part from yoru credit rating is up the creek.

This varies depending on the State.

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> Commentary by Matthew Lynn

> Aug. 8 (Bloomberg) --

> The net result is that even as payment problems mount,

> people will carry on taking out bigger mortgages. What choice do

> they have?

Erm, cheap rent? :rolleyes:

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Well it omitts one importnat difference between the US and the UK market. Namely in the US you can walk away with no further consequences part from yoru credit rating is up the creek. In the UK the lender will pursue the debt until the day you die. Unless of course you declare yourself bankrupt. Sounds like that could be the answer for many especially now the laws on easier on these people. Roll on the cash society.

sorry people took a phone call between starting and finshing the post so some got there first.

Another thing in the US The Local authority takes a charge on any outstanding debt on a house that must be cleared before teh house is sold. In teh UK not teh case.

I remember reading somewhere that in the US it is now illegal to walk away from your debts. New legislation was introduced in about 2005 I think - sorry I can't find any links. In addition, if the bank writes off any of your debt, this is treated as a taxable benefit so you still end up being liable for a chunk of it.

In the UK I think what you state is correct.

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