UK lenders were bailed out by the tax payer and everyone is still paying for this action. The housing market ground to a virtual standstill, values plummeted and negative equity and repayment problems loomed.

Bad Mortgage Lending Practices and the Suffering

• The high loan to valuation ratios 125% in some cases. In retrospect this was gross over lending against week security.
• The lack of stress testing of the borrowers ability to repay. Care of the mortgagee was none existent.
• Inadequate assessment and checking of borrowers income. Personal debt increased often to unsustainable levels as did government and bank debt.
• Lax valuation criteria and lenders greed for a deal at all cost. Profits for the lender pain for the borrower.
• Excessive interest only lending with no affirmation that plans were in place to repay the capital. Long lasting and insurmountable debts.
• Creative and ‘flexible’ loan products driven by fees. Borrowers were caught with high fees.

Enter the FSA with the Speed of Light (Not)

‘The FSA wants to avoid history repeating itself and is proposing and consulting on three ‘new’ rules:
1. An affordability assessment must be carried out which includes verifying an individual or couple’s income. This was not always the case during the last boom.
2. Unavoidable bills such as utilities, council tax and spending on children must be taken into account.
3. All mortgage lenders must consider potential rises in interest rates and assess whether a borrower would be able to repay in such an eventuality.’

FSA Considering New Rules

• Regulation is still a ‘gentlemens club’ and problems may happen again as currently with SVR increases where lenders are currently testing the boundaries of the unacceptable.
• The onus should be on the lender to ensure regular interest and all capital payments are feasible. Borrowers should get more street wise after all the publicity and aggravation they have endured.
• Consumers need FSA protection from bad lending practices that can lead to the personal distress of arrears and repossessions.
• Rules need to avoid unintended consequences which is achieved by clarity, openness and frank exposure .
• Lenders need a clear and supportive regulatory framework so they can help restimulate the housing market
• New rules should avoid duplicating EU regulation.

The Bank of Ireland sell mortgages in the UK under the brands Bristol and West and the Post Office. Due to the cost of funding mortgages they claim they too must increase their standard variable rate (SVR). Bristol and West customers will pay an extra 1.5% when the rate goes up from 3% in June to 4% then another rise in September will take the rate to 4.49%.
The Post Office branded mortgages are not yet included in the change of rate.

Why are Mortgage Interest Rates on the Increase

• All the lenders concerned are claiming that the cost of retail and wholesale funding has now increased.
• The Bank of England are due to close the special liquidity scheme that provided emergency mortgage funding.
• Cynics would say that rates are being increased because the lenders think they can get away with it! If that is true expect other lenders to find ways onto the band waggon very shortly
• Despite bank base rate being held for the 36th month in succession at 0.5% the government seem happy to see the SVR begin to edge upwards.

Spending a working life in the mortgage and lending business is no guarantee that your “trusted adviser” isn’t a crook.
‘A Pennsylvania mortgage broker got 30 years behind bars after defrauding more than 800 borrowers in a Ponzi scheme, which somehow kept all the balls in the air for 20 years. A Kansas City, Missouri, appraiser pleaded guilty to mortgage fraud and was sentenced to 20 years in prison, plus a $500,000 fine.’ about.com

‘A pair of fraudster brothers built up a property portfolio with the help of a crooked building society worker. Billy Blue Ingham and Bobbie Jo Ingham obtained loans for £700,000 by lying about their lifestyles before snapping up properties in Salford. Anna-Marie Fletcher, a worker at the Cheltenham and Gloucester in Farnworth, Bolton, waved through the dodgy mortgage applications, a court heard. Manchester Crown Court was told she stood to gain thousands in bonuses for meeting targets.’ Read more at: Manchester News 25/1/12

Obama alleges misconduct by financial institutions including issues with mortgage lending and the packaging and selling of home loans into bonds for purchase by investors – focusing on the mortgages “that led to the global financial crisis”. FT.com 25/1/12

Leeds are becoming innovators in the mortgage lending field. If you are looking for a mortgage on a shared ownership property with a registered housing association then try Leeds. They may lend the full amount of your share of the mortgage without any deposit.

Shared Ownership

• On these shared ownership properties you normally own a minimum of 25% upto 75% of the property and the housing association own the rest.
• You will still be paying rent on the portion you do not own. You will also be repaying the mortgage on the part you do own.
• Existing, renovated or new build homes can be owned under the scheme.
• Shared ownership is open to people who rent council or housing association properties and first-time buyers.
• Shared ownership properties are always leasehold homes.

Leeds Mortgage Scheme

• The loan does not require any deposit from the borrower and also offers a free standard valuation worth up to £335.
• There will be a booking fee of £199 but there is no completion fee or higher lending charge.Redemption at the end of the mortgage is also £199.
• The society claim “By providing a product that offers 100 per cent of the borrower’s share and very low set up costs, we hope that we can help customers who aspire to homeownership in 2012 and can afford the monthly payments, but currently cannot save a big enough deposit, to buy a share in a property and eventually own it outright.”
• Shared Ownership 2 Year Fixed Rate up to and including 31 March 2014 100% of borrowers share interest at 6.49%.
• Shared Ownership Fees Assisted 5 Year Fixed Rate 5.99% upto 95% of borrowers share up to and including 28 February 2017.

Housing Market Comments

• Under these government schemes you can keep buying further shares of the property or ‘staircase’ until you own the property outright.
• Rental costs are currently very high and this scheme may be a way or reducing the overall cost of housing whilst getting on the property ladder without a deposit. Despite that the interest rates are higher than traditional with deposit mortgages.
• Always get independent advice to ensure you fully understand the scheme and your commitments.

Read Right to Buy – Right to Own for a look back at the policy.

Cut the 50p in the pound income tax rate! (To help the poor souls earning over £150,000 pa.)
Cut the rate of Vat! (to stimulate imports?)

Well we have another angle for George Osborne to consider. Reintroduce Mortgage interest tax relief.

Benefits of Mortgage Interest Tax Relief

• It will help stimulate the housing market.
• When interest rates increase it will help make ownership and repayments just that bit more affordable.
• The squeezed middle class will feel they are getting something from a government they helped to put into power.
• Lenders will be able to assess credit risk a bit more favourably.
• A stimulated housing market will help construction, the economy and ultimately the tax revenues.

Go for it George!

Why Is Mortgage Verification Needed

• Fraud prevention needs to be improved after a lengthy period of lax control by lenders.
• In some large scale mortgage fraud cases there had been no proper verification of income.
• For many buy-to-let schemes self-certifications of income was accepted without proper scrutiny.
• In some cases applications had been made using stolen or false identities.

What is Mortgage Verification

• ‘Mortgage verification’ is a joint initiative set up by the Council of Mortgage and HMRC so building societies and mortgage lenders can combat fraudsters.
• It will help lenders assess risk by the exchange of data with HRMC in cases where mortgage lenders have reasonable suspicion that a mortgage application is fraudulent.
• Lenders can then have confidence in borrowers credentials after they are checked against the HRMC tax data.
• Fraud often happens where people overstate income to borrow more money, even to the extent of forging payslips. Now the often complex income statements can be checked against the HRMC records.
• The scheme, costing £14 per case, allows lenders to check income information submitted on a mortgage application form against HMRC records, using a secure electronic platform.

Comment on The Mortgage Verification Scheme

• After a successful pilot the scheme was rolled out from 1st September 2011.
• What is in this for the HRMC? A cynic may think it was a scheme to find people who were not declaring taxable income.
• Buy-to-let landlords are likely to face ongoing and probably reasonable interest from the taxman.

Other Mortgage Fraud Initiatives

• The Financial Crime Operations team of the Financial Services Authority started a thematic review of mortgage fraud and lenders’ systems and controls .
• To our mind there is still a deal of complacency as the FSA state that “the industry has made progress in getting to grips with this problem over recent years. Defences are now stronger, and the value of cross-industry cooperation is better recognised.”
• The FSA suggests weaknesses in some areas of the mortgage industry, such as the high incidence of solicitor fraud, still undermines the effectiveness of the sector’s overall efforts to curtail fraud.
• The extension of the approved persons’ regime to include anyone who advises on or sells mortgages has been deferred.That is telling them well done FSA!

UK Financial Investments Limited (UKFI) is wholly owned by the Government. UKFI manages HM Treasury’s 100% shareholding in UK Asset Resolution Limited (UKAR) and investments in Lloyds Bank and Royal Bank of Scotland.

• UKFI should ‘protect and create value for the taxpayer as shareholder with due regard to the maintenance of financial stability and to act in a way that promotes competition’.

UKAR is the holding company established on 1 October 2010 to bring together the Government-owned businesses of Bradford & Bingley plc and Northern Rock (Asset Management) plc (NRAM).

• UKAR should manage the closed mortgage books of both Bradford & Bingley and NRAM to maximise value for taxpayers.

• The Executive team of UKAR manages both organisations focusing on this common objective, whilst ensuring that both companies continue to treat customers fairly, deliver consistently high levels of service and support those customers facing financial difficulty.

• UKAR is not authorised or regulated by the Financial Services Authority.

• UKAR does not offer any new mortgages but deals with customers directly, who continue to be serviced through the subsidiary businesses of Bradford & Bingley and NRAM

How it all Arose

• Northern Rock was nationalised and taken into Government ownership in February 2008 and was then restructured into two legal entities on 28 October 2009 – Northern Rock plc and Northern Rock (Asset Management) plc (NRAM).

• NRAM retained the majority of the pre-existing mortgage book and all pre-existing unsecured loan accounts. NRAM is permanently closed to new lending, but continues to provide services to some 610,000 existing borrowers.

• On 29 September 2008, all of Bradford & Bingley’s retail branches and its savings accounts were transferred to Abbey. These were rebranded Santander in January 2010.

• The remainder of the business, including the mortgage books of Bradford & Bingley and specialist lending arm Mortgage Express, were nationalised and taken into public ownership by the Government. Bradford & Bingley is permanently closed to new lending, but continues to provide services to some 240,000 existing mortgage borrowers.

Together, the combined organisation support or are left with around 800,000 customers with £77 billion of loans, employing some 2,400 colleagues at our main sites in West Yorkshire and the North-East.

The management and control of NRAM was integrated with Bradford & Bingley under UKAR on 1 October 2010.

Where too Now

• The debts are owed to the UK government through all these companies. The government is between a rock and a hard place (sorry about the pun).
• The arrears could increase as interest rates increase and this will put pressure on repossessions. Will this be politically acceptable?
• To pre-empt problems a pilot programme of phoning mortgagees and asking about problems is being conducted.
• Warning signals of problems include missed repayments, rescheduled payment dates, cancellation of direct debit instructions, problems with other personal credit.
• Selling the debt at a discount would also be a potential political minefield. Selling blocks of debt was one of the problems causing the crash in the first place.

Who Has Negative Equity

• For information on negative equity see What is Negative Equity
• More than 7% of home owners with a mortgage have a loan bigger than the current value of their property.
• There are over 800,000 such properties in the UK.

Why has Negative Equity Arisen

• Collapsing property values have been the main cause of the gap between loan to value.
• Low deposit mortgages and lack of original equity in a property is also a major cause.
• Negative equity would be worse if the interest rates were not so low and more people were in default.
• In the early nineties there were over 1.5 million in negative equity but until the recent slump these numbers had almost been  eliminated.

What to Do in the Negative Equity Trap

• If you can ‘keep on keeping on’ there is no cause to worry. Eventually your negative equity will be eliminated.
• Do not get worried and flustered just by negative equity. You are not alone! The negative is not crystalised whilst ever you continue to pay your mortgage.
• You may find it hard to remortgage to get a fixed rate deal if you have negative equity but shop around.  There are negative equity deals around but they are expensive. See Halifax web site.
• Some lenders allow you to port your mortgage if you are forced to relocate for work reasons.

Comment from Housing Market

• If you have a joint ownership and negative equity take this into consideration in the event you split up. An equity surplus would be shared so should an equity shortfall.
• The crucial issue is keeping up with the regular repayments. You entered a contract to do that and as long as you maintain those payments any negative equity is only notional.
• A property is worth what someone is willing to pay and negative equity can only truly be calculated on sale.

What of Fixed Rate Mortgage Interest.

• The average two year fixed rate mortgage in the UK has fallen to 4.25%

• Five year fixed rate deals are available at below 5%. This is the cheapest rate for almost quarter of a century and longer than most mortgage terms.

• Two or more years of low interest rates, as predicted by the Bank of England, also make standard variable rate deals look attractive. Beware they do not suit everyone, there is still no one size fits all.

• Product fees have yet to be brought under suspicion of miss selling but the day may come. Meanwhile take care with fees and costs if you are thinking of ‘porting’ your mortgage to a fixed rate deal. The total cost is the crucial issue not the percentage rate.

• Felixibility comes at a price and there is an interesting 10 year fixed rate deal from Skipton Building Society at 5.85% with no fee that would suit many who are less concerned about flexibility.

• The size of deposit still attracts a differential interest rate. Yorkshire Building Society charge  4.64% with a 15% deposit but only 3.69% with a 25% and above deposit.

Comment

• Housing market issues of price, loan interest and market activity are still controlled and constrained by the financial turmoil at the powerful banking and financial organisations.
• The damaged state of the western world economies is not going to resolve in the short term. When it is bad it is very bad!
• Mortgagees should keep an eye on the best deal for their own situation. If in doubt sit it out.
• Read Is it Time to Fix Your Interest Rate?

Higher interest rates increase the cost of mortgage repayments making it less attractive to buy houses.

Lower interest rates, with adequate supply of loan funds will make it attractive to buy houses.

In the UK many homeowners have a variable mortgage. This means that the cost of their mortgage is dependent on changes in the Bank of England repo rate (better known as the base rate)

If interest rates increase the following occurs.

• Mortgage interest payments increase, reducing disposable income of consumers
• Demand for houses falls, possibly causing lower house prices.
• Higher interest rates also make it more attractive to save rather than spend money.
• Higher interest rates also increase the value of the exchange rate, though this has little impact on the housing market.

Time Lag of Interest Rates.

When the Bank of England increases interest  rates it might take a long time before it has an effect on reducing demand. This is because people don’t respond immediately to changes in interest rates. Firstly a significant % of people have a fixed rate mortgage and therefore, they will be insulated from changes in the interest rates for the duration of their fixed rate term. However, when their term expires they will have to negotiate a new deal. If rates have increased alot they will experience a significant impact on the cost of their mortgages.

Depends on Economic Situation.

The effect of interest rates may also depend on the situation of the economy. If the economy is in a recession, then any increase in interest rates would have much more effect than when the economy is doing well and people have a lot of confidence.

Base Rates and Bank Rates.

When the Bank of England change interest rates, commercial banks are not forced to change their rates. Sometimes the Bank of England may cut rates, but commercial banks may decide to keep theirs unchanged and just make a bigger profit margin.

International Events

The 2011 Euro zone crisis will push up interest rates. The downgrading of USA from a triple AAA+ rating means the US will have to pay more to borrow on treasury bonds. This will push up interest rates generally and on housing finance specifically.

Low interest rates in the UK since the housing market crash has not protected the Housing Market. The drop in values may have been significantly worse if interest rates had been higher. More defaults, repossessions and more stock on the market without funding.

Updated Aug 2011 from April 2008