Monday, December 31, 2007

More parallels with the US for the UK in the New Year

Defaults moving beyond sub-prime

We have these mortgages in the UK only they are called mortgages with payment holidays, if I remember rightly a good proportion of the Northern Rocks books hide customers who are currently 'on holiday'. The new year will hold some big shocks for mortgage holidaymakers here too.

Posted by enuii @ 05:05 PM (397 views)
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5 thoughts on “More parallels with the US for the UK in the New Year

  • new user 2007 says:

    Brokers will no longer be able to take made up salaries at face value i.e. our self-certiLIED. These people number in the hundreds of thousands. This is not just the unemployed as the media seems to suggest…many professionals and foreigners I know in London made up their incomes to get multiples of more than 7 in the last two years. They will see their rates jump from under 5% to at least the SVR, when they had already stretched beyond what they could afford. They have survived this long but that was before any financial shocks…I would say a jump from 5% to 6.5% (best case scenario) is such a shock (they were told remortgaging would always be possible at around 5% as inflation was dead forever). Many have been compensating through credit cards, but that has also ended.

    I think the payment holidays here are a lesser factor? The US seems to have been people getting away with paying a quarter of what they were meant to, whereas ours is more like half up to a maximum of one year? Either way, I suspect the people taking payment holidays are also those who stretch themselves to begin with. Those with small or no deposits, or just used up their equity will also be in for a shock methinks.

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  • Well-spotted, enuii! Yes these are a bit like our payment-holiday mortgages Northern Rock appear to still be offering very generous terms for payment holidays:
    http://www.northernrock.co.uk/mortgages/flexibility.asp

    In the UK we also have Offset mortgages – pioneered by Virgin’s “one account” and now offered by most of the major players (Barclays/Woolwich, Lloyds TSB, etc.). I wonder if these will also be found to have some subprime element? I can imagine the banks offering MEWed money surreptitiously via an offset mortgage, without the customer being fully aware of the implications.

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  • Of course the problem goes well beyond the sub-prime market. Everybody was looking for leverage when the market was shooting up. For mortgage borrowers this meant over-stretching to get the most valuable house possible because a 20% rise on an expensive house gives a bigger profit than a 20% rise on a less expensive house. Research by the Wall St Journal a couple of months ago showed that people with good incomes and credit ratings were taking out loans classed as risky (defined by % paid above base rate) because they wanted the leverage. Asset bubble + easy money = sub-prime. More merde is flying over to the fan.

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  • Planning4acrash says:

    My parents hold a flat in London under an offset. I worked out that, with the opportunity cost of not having interest on the “credit” in the account, that they made 25quid a month!! Idiots refuse to sell, even though their income from the investment would jump to 5000 quid if they sold now at todays prices. My inheritance up in smoke, I’ve been banging on about it, shown them this website, but they are so used to house price inflation that they think any fall is only short term.

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  • “Although a broker might earn $4,500 for selling a $300,000 fixed-rate loan, Diamond said, the commission could total $12,000 on an option ARM of the same size.” – Once the banks invented these SIVs they clearly tried to stimulate loose lending. As the article says all these fudged numbers didnt matter as long as house prices kept going up. Ours havent really turned down in a convincing manner yet. When they do I bet we will be reading about the imaginative financial models the UK mortgage industry came up with.

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