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Repos to raise the roof

So, the authorities have acted at last. The Bank of England has itself now been renation-alised and is firmly back under the control of the politicians at the Treasury. By the way, am I the only person who thinks that the “independence” of the Bank of England has been an unmitigated disaster – more of this another time.

Quite incredibly, the Prime Minister and Chancellor are now being lauded for acting decisively.

The truth is that the Labour Government has wilfully imploded the economy since August last year. What was always going to be a tough economic downturn has been transformed into a potential once-a-century meltdown.

The US may have given us this contagion but at least they moved quickly and decisively – over a year ago. The dramatic base rate cut should have mirrored the Fed’s move in September 2007 – talk about being behind the curve.

When there is time for the post-mortems, then the closure of the mortgage-backed securities market in August last year will be a defining moment – not the collapse of Lehman’s and its domino effect across the global banking sector. The authorities really did have time to act but instead will now preside over a far deeper and longer recession than should have been necessary.

So, recession it is. With unemployment now rapidly rising, mortgage arrears will surely follow and the looming spectre of repossessions. An immediate area of concern for the policymakers in the UK is the striking disconnect Building up to a bigger shortageWhat next for the UK housing market? A recent report estimated that the UK has a housing shortage for circa 1.4 million households. The Government policy is to facilitate the building of circa 200,000 properties per year until 2020 (one housebuilder I spoke to last week thought 25,000 units would be closer to the mark next year). Now is the time to start considering the social and economic costs to the country.between three-month-plus arrears rates today and the level of repossessions compared with the corresponding ratio in the last downturn of the early 1990s.

There is a far higher level of repossessions happening today already than you would expect when com- pared with the last downturn. If the projected unemployment figures materialise in 12 months time, then the expected arrears at this level would imply a six-figure annualised repossession number at the current level in the UK. Without wanting to sensationalise, the repossession number could top 100,000.

What is happening? Let me recount one example of the plague now infecting our market. During the summer, at one conference discussing arrears management and servicing, there was Next week: Who are the real winners and losers in this changed market, what exactly are the financial returns available which are attracting “investors” and what are the options for policymakers?a presentation by a Lehman’s executive with responsibility for Capstone, its in-house mortgage servicer responsible for the Lehman brands, SPML and Preferred and their various offspring.

His chosen topic was “loan modification”, as the Americans call it. He gave two examples of an approach to an existing borrower wanting to make an arrange-ment, as we tend to call it.

In the first example, the borrower had a high loan to value ratio of 90 per cent, was paying them, say, £500 a month but the pay rate increase at the end of their teaser period increased their payment to £800 per month. The borrower could not afford this, so the solution was to keep the borrower on £500 a month because increasing his payment might risk him paying nothing – in other words, £500 is better than nothing.

Take borrower number two, in exactly the same situation but on a lower LTV of 60 per cent. No loan modification would be offered, hike up the mortgage payment, allow the borrower to fall into arrears and either capitalise the arrears later or take into possession if able to.

Even at this lowish LTV, there is typically little or nothing left for the borrower after fees and the usual market value less 25 per cent for repo at auction. How do TCF guidelines work here?

PS: If you have any information to share or points to make, please email me at Michael.bolton@centaur.co.uk

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