Interest rates here in the UK are sitting at an all-time low, and have been there for a record-breaking length of time – we’re now into the 28th month.
The talk of when they will start to rise again was getting quite loud in early Spring, with estimates being sometime this summer. Now, there are still a lot of predictions around, but due to the economy not growing as much as predicted, the most popular seems to take it out to next summer now, perhaps to August 2012.
My personal portfolio manager at Mortgage Express has visibly relaxed recently! Earlier this year, she was urging me to create an exit strategy.
This was in my best interests, of course – she was concerned that if the value of my portfolio fell into negative equity, at the same time as rates started to rise, I’d be unable to remortgage away from MX. And I’d want to remortgage away because, now they are nationalised and looking to unwind their entire mortgage book, they’ll deliberately become increasingly non-competitive. But it was also in their interests, as they want to wind the mortgage book down as soon as they can, and they want people like me out of the door and away down the road to another lender.
As it is, they’re charging me 1.75% across the board, so I don’t want to go anywhere just yet!
We shouldn’t relax too much, though. Even if the first rate rise is a year away, that year will be gone soon enough…and then what?
I’ve been suggesting since the start of the crisis that there are a lot of ‘amateur’ landlords that will be in difficulties when rates start to move. By amateur, I’m not being disparaging in any way. I just mean people in full time employment, or in retirement, who saved up enough to get one or two rental properties during the boom years. What I suspect a lot of them don’t have is either a) a substantial cash cushion in the event of extended voids, blown-up boilers, or a monthly shortfall between rent received and mortgage paid, or b) significant spare income each month to cover such eventualities.
When rates start to rise, a lot of these people will struggle to keep up. Many of them will have their properties repossessed. And these repossessions will then, in the normal course of events, hit the market via auctions. My fear has always been that such a glut of available properties will drive prices down harder and further than we saw in 2008 / 2009, which will then push more people over the brink.
It’s not just investors. It’s ordinary homeowners, too.
Richard Banks, CEO of UK Asset Resolution, the state company that runs the £80 billion of mortgages bailed out by taxpayers during the banking crisis, said last week,
“You can see if you don’t do something about [higher rates], you can see a tsunami”
As the UK’s fifth largest lender, as a result of all the nationalisations, and with 750,000 mortgage customers on his books, he’s right to be worried. (In fact, I’m one of his customers, as the bits of Bradford & Bingley that weren’t taken over by Santander / Abbey were nationalised, and Mortgage Express were a part of B&B).
What choice do the lenders have, then, other than to repossess?
My friend Jason (who gets two mentions in this post – can you spot the other one?) once said to me that repossession is a harsh and brutal process that has no place in any Civilised society. At the time, we were talking about all the options that could be presented to a struggling homeowner that don’t involve throwing a family out onto the street with all their belongings carted off to storage.
It now turns out that the Americans may be onto something.
For the past four years, they’ve been toying with the idea of having lenders give the option to homeowners who are about to lose their homes (they foreclose over there, they don’t repossess…) to stay in the property as tenants, paying market rates.
This is hardly a new idea. I’ve done sale and rent back deals myself, until the FSA stamped on the market a couple of years back. It can still be done, through the better licensed SRB providers, but even those guys are struggling with FSA rules, and accessing sufficient funds to keep up with demand.
This Is the FSA Logo
This is Definitely NOT the FSA Logo
The question is – could we borrow this idea from the Americans?
From a consumer point of view, it’s sounds great. You get behind on your mortgage payments and, rather than get turfed out by the bailiffs, you get to stay on as a tenant. Of course, you lose ownership of your home, but at least you don’t lose your home. The deal lasts initially for five years, which gives you plenty of time to come up with a Plan B.
There are downsides to it, of course.
The biggest one the Americans have been wary of is the ‘moral hazard’. It could send out a message to all homeowners that this is an easy, quick-fix way out, and could therefore be open to abuse. There’s also the “unintended (?)” end result that the banks – or, in the case of UK Asset Resolution, the UK government – get to hold onto all those properties and, in effect, become a massive landlord that owns great swathes of UK housing stock.In a similar way, Freddie Mac and Fannie Mae are both owned by the US government, which makes the US government the largest holder of mortgages by a long way.
Do we want our government to be our landlords?
Is this a way of muscling in on the property investor market through the back door? Or is it a way of returning to the pre-Thatcher days in the UK where the government did own large numbers of houses, for the good of the wider community? Or is it simply a way of avoiding the pain, both at a individual and family level, and at a broad economic and market level, of mass repossessions once rates start to rise?
Hi.
If the owners were struggling to pay a Mortgage. What makes you think they will pay rent?
Regards.
Darryl.
A few comments.
1. I was slightly confused by your description of MX, their desire to have you refinance and the relative merits. In case it is not clear to the other readers, there is nothing MX can do to move you along even if you have negative equity. Unless the borrower defaults the lender cannot call the loan. At 1.75% over the BoE base rate, the loan will have one of the lowest interest rates for most of the life of the loan. No one is offering financing at such thin margins these days.
2. Jason’s view is just wrong. There is no right to home ownership. A lender should repossess (or foreclose if the US) when the borrower is unable to pay. Alternatively employers should stop paying workers when it becomes a bit tough for the employer to do so. Either we believe in commitments, contracts and obligations or we do not. If people are allowed to just stay without paying, would you lend them money? At the end of the day the money the banks lend comes from depositors or maybe the taxpayer. We do want our money back.
3. In the US it is illegal for a bank to own real estate it does not need to run its current operations. If a home is taken back from a borrower in a foreclosure action, the bank must quickly sell it on rather than hold it as an asset. It does not matter if the market will be better in a year or two. Banks are required to avoid at all cost investments in real estate that are not required for operations. This law came about after the Great Depression when it was observed that many banks had invested in real estate using depositors money.
“2. Jason’s view is just wrong. There is no right to home ownership. A lender should repossess (or foreclose if the US) when the borrower is unable to pay. Alternatively employers should stop paying workers when it becomes a bit tough for the employer to do so. Either we believe in commitments, contracts and obligations or we do not. If people are allowed to just stay without paying, would you lend them money?
John
If you have ever been repossessed or been involved in the sharp end of repossessing a home then you might have a different perspective. The (wrongly held) view that people who have their property repossessed in some way deserve it for not honouring their commitments, is harsh, unfair and (mostly) not true. Have think about this.
As austerity bites people are indeed being paid less by their employers – hours cut, jobs cut entirely, wage rises out of kilter with inflation and a number of other factors beyond their control could all easily put a good many people in a precarious financial position whereby they default on their mortgage payments and begin the journey to losing their home. This comes on top of some of the other (many) effects of austerity – taxes going up (in all forms) also means less money in peoples pockets, less services delivered by central and local government.
The alternatives to repossession do not mean allowing people to just stay without paying. There are a number of solutions, some of which are exercised by lenders, others which are sadly not, which could ensure repossession is a very last option, not all too easily a first.
It is worth considering the effects – personal, social and economic – of repossessing a home. The stress of the process can lead to illness, break up of family units and relationships and other problems (drug or alcohol abuse for instance). The breaking up of the family unit would mean the taxpayers having to provide not one, but two alternative homes. The cost of dealing with illness through medical intervention is also borne by the taxpayer. Illness could also mean the breadwinner is no longer able to work at all and therefore becomes a further burden on the state, not a contributor. Lastly – a default looks bad for the Government and Lender – they are both highly motivated to mask these statistics right now.
At the end of the day the money the banks lend comes from depositors or maybe the taxpayer. We do want our money back.”
This is not an accurate description of the way money is created as debt by banks. They do not lend money that comes in as deposits from anyone. When a mortgage is granted the money is created out of nothing but digits on a computer. The value of the mortgage is entered onto the banks (or other lenders) computer as a liability and payments to them commence. Once you understand this process of money creation as debt, you can see why banks should and could be more flexible about their treatment of borrowers with payment difficulties – after all, when the banks got into trouble through themselves each taxpayer bailed them out – an act of incredible generosity that you and every other taxpayer, your children and quite possibly their children will pay for whilst ‘they’ go back to gambling and making huge money from soclalising their risks and privatising their profits.
Excellent Blog !!!!