The ratings agency assessed all the UK prime residential mortgage-backed securities and found that, by value, 15 per cent of the loans were worth more than the properties backing them. It also warned that up to a third of prime securitised mortgages could be in negative equity if house prices fall another 14 per cent, as Fitch predicts.
Fitch head of RMBS for UK and Ireland Alastair Bigley says: “Among the loans in our analysis, which constitute nearly 25 per cent of all outstanding UK prime mortgages, around 270,000 borrowers are in negative equity.
“Of the 2.7 million prime mortgage loans totalling £263bn securitised through RMBS, more than £39bn of those are in negative equity. This figure will rise further as house prices continue to fall.”
While negative equity need not be an immediate concern, should we be worried that so many peoples’ mortgages are underwater? The general consensus seems to be yes.
First Action Finance head of communications Jonathan Cornell says the Fitch figures are not surprising considering the amount of leveraging that took place during the boom years, but he is concerned that it means many homeowners are now trapped. He says: “It will obviously be very difficult for those in negative equity to move so it does not help the housing market. But the biggest worry is unemployment. If you are in negative equity and out of work, then you have few options.”
The Bank of England is also troubled by the statistics. Monetary policy committee members Andrew Sentence and Kate Barker both expressed their fears at a Treasury select committee meeting last week.
Sentence said: “The recession is still unfolding and the impact on peoples’ employment and income does mean problems of arrears and repossessions will increase even if the housing market picks up.”
Barker added that any increased buyer interest in the market could be a false dawn. She said: “Because we expect unemployment to rise, we would expect further repossessions through the year and that will be a sort of countervailing measure against all the positive things going on.
“The issue of negative equity can be overplayed but of course it only becomes a problem if the borrower falls under some stress. The difficulty with regard to financial stability is if we start to see repossessions coming back on the lenders themselves – a not unsubstantial risk.”
The Trade Union Congress found that at the start of June, UK unemployment figures were at 2,261,000, up 232,000 on the quarter and 605,000 on the year. It says these figures paint a bleaker picture than that of the last recession.
TUC general secretary Brendan Barber says: “There are no signs that the outlook for unemployment is starting to imp-rove. The difference between the numbers of people losing their jobs and finding new ones is already much worse than in the recession of the 90s. And even when the economy does start to grow again, unemployment will increase for a good while to come.”
Oakwood Group chief executive Mike Culhane, who manages 16,000 UK mortgages, says the negative equity figures along-side the unemployment figures prove there are more shocks to come.
He says: “If the economy does not improve, there is a chance that repossession and arrears figures could rise in 2010.”
Shelter echoes Culhane’s warning. The charity has seen a 250 per cent increase in the number of calls to its free helpline regarding mortgage arrears over the last year and says if action is not taken now then more repossessions could be around the corner.
Chief executive Sam Younger says: “With arrears escalating at an alarming rate, unemployment at its worst levels for 12 years and interest rates very likely to rise next year, a second, more devastating wave of repossessions could occur within the next two years.”
Property Portfolio Rescue, a distressed property specialist, says the UK is sitting on an arrears “timebomb” and needs to deleverage its huge owner-occupied population before repossession rates rocket.
PPR director Nick Hopkinson says: “The Fitch report should act as a wake-up call – around one-third of all UK mortgages are likely to be in negative equity by next year.
“Anyone worried about their job or ability to continue paying their mortgage in the near future should be acting now, selling their property, getting specialist debt or mortgage advice and reigning in their spending wherever possible before it is too late.”
Hopkinson adds that this is an area where advisers can help; by advising a property sale rather than clinging to an underwater mortgage, everyone will come out stronger. He says: “Many homeowners are sleep-walking into a nightmare combination of reduced household income, negative equity and higher mortgage costs.
“With house prices expected to fall a further 10 per cent from today, anyone at risk of negative equity could be in serious trouble if they delay in selling or addressing their situation any longer.”