What is Cost of Bailout for Taxpayer?

By Tejvan R Pettinger on September 30, 2008 in economics, UK housing market

If the government nationalise Bradford and Bingley, the taxpayer is taking responsibility for the mortgage loans. This gives the government a balance sheet of £150bn in mortgage loans (£50bn from Bradford & Bingley, £100bn from Northern Rock)

It is misleading to say this will cost the taxpayer £150bn (like the Telegraph does in the heading). It means the taxpayer is potentially liable for the mortgages. However, it is not unfeasible, the government will receive most of these mortgage payments back. It would only cost £150bn, if there was a 100% default rate on mortgage payments from Bradford & Bingley and Northern Rock)

Despite, the much publicised problems in the housing markets, default rates are still relatively low – even for high risk groups like self certification mortgages.

The one positive aspect of the current house price crash is that at least interest rates are low (5%) and is likely to fall even further. Therefore, this will prevent a rapid rise in mortgage defaults.

However, given deteriorating economic conditions. In particular rising unemployment, 2009 is likely to see a worsening of mortgage defaults. Unemployment is one of the biggest causes of mortgage defaults.

Falling house prices will also exacerbate the losses of mortgage companies – especially for mortgages which were 95% or even 100% of LTV.

Falling house prices are a big concern for landlords who need to refinance their mortgage deals by using the (falling) value of existing housing stock.

My feeling is that the actual cost to the taxpayer will be relatively low (certainly lower than if the banks had been allowed to go under) Nevertheless it is still a salient reminder of the fragile state of the banking industry that the on average every UK taxpayer is liable for £5,500 of mortgage debt.