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Merchant of Magadan

Negative Equity

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On 10 June the papers were flush with the story that the CML had warned that 23,200 people who had taken out 100% mortgages last year could soon be in Negative Equity. Could be ?

Today the CACI survey raised the figure to 150,000 (not restricted to 100% LTVs) and warned it could be 360,000 if there were a 20% fall.



Not included in these figures

1. Mortgage Equity Withdrawal. Even people who bought in 1970, 1980, 1990, or 2000 can get swept up into the maelstrom. Mortgage Equity Withdrawal (MEW) converts an historic purchase price into a new, invariably higher one and takes you many steps closer to the 100% LTVs.

There might be many reasons for an MEW - a) holiday home purchase B) refurbishment c) leisure expenditure d) BTL ramping to enable the next puchase e) capital expenditure on children f) cash-flow problems.

Although d) and f) are obviously highly problematic, it looks at first glance as if a) B) and c) are simply transfers of wealth. But they are transfers of wealth in a declining market so are merely less toxic (admittedly by a long way) than d) and f)

2. BTL Portfolios. The 100% LTV figure exludes all those BTL Portfolios which effectively borrowed a) more than 100% and B) inflated the value of present value to increase the MEW in order to produce the cash for the next deposit. ENTIRE PORTFOLIOS WILL HAVE TO BE LIQUIDATED. By a lot more than 20%. Ergo the 360,000 CACA figure must go higher.

3. Previously mortgageable property (just), most notably Council, will be unmortgageable. The difference between a Cash price and a Mortgageable price is a lot more than 20%. Ergo, the 360,000 figure must go higher.

4. Liar Loans. When these go wrong and forced liquidation ensues, the shortfall will be more than 20%. Ergo....

5. And the genie in the lamp is of course the avalanche of unemployment. Just as MEW converts the purchase price, unemployment scuppers the 25 year mortgage contract.

And so on and so forth...

I think this market will retrace to at least 2003. THEREFORE ALMOST 100% OF TRANSACTIONS POST 2003 could go badly wrong. Some will be able to stick it out but when unemployment strikes in the form I think it will, the 360,000 Negative Equity or 200,000 Repossessions being touted will simply look laughable.

You do not want to know the number of post-2003 transactions. If you thought the CML 23,200 was scary....

Downward spiral or Mansonesque Helter-Skelter ? Dunno. But take your pick.

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6. Fraudulent inflated valuations of new build properties so the builder could "pay the deposit" and represent it to the lender as 90% LTV instead of the true 100%.

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