Latest UK Mortgage News

• Dangers of 100% mortgages - How a fall in house prices can leave people with a 100% mortgage vulnerable to negative equity.
• Mortgage Fraud in UK Sub prime Markets - Looking at the Panorama investigation into mortgage fraud in the UK Sub prime markets
• Struggling to Pay Mortgage? - If you are struggling to pay your mortgage, these are some tips to help you preventing defaulting.
• Abbey Blames global crisis on rate rise
• See also why interest rates can rise due to a change in risk
• Any signs of a property price crash? at BBC
  

What Happens if your Mortgage lender goes Bankrupt?

What happens to a mortgage if the lender goes bankrupt and you are
paying a mortgage on that property? - Reader Question

If a building society such as, The Northern Rock, was to go bankrupt your legal requirement to pay back your mortgage remains. However, you will be paying back your mortgage to a different company. This will be whoever decides to buy the existing mortgage contracts from Northern Rock.

The mortgages of Northern Rock make an attractive purchase for other banks because they will receive your future repayments. The problem Northern Rock have is that they have a temporary shortage of funds, and customers are under no obligation to pay back extra mortgage repayments.

Therefore, you will continue to make repayments. However, it will be to a different company.

The mortgage contract will also have to be honoured by the new company. E.g. if you are on a three year fixed rate deal, this will stay exactly the same until the three year period ends.

What may change is that you will have to deal with a new mortgage company, who may offer better or worse customer service. When your fixed rate deal ends, your new company may offer different mortgage deals. However, at this stage you would be able to remortgage to another company.

In the US many sub prime mortgage dealers went bankrupt but their mortgages were sold for less than face value. This is because new buyers expect some sub prime borrowers to default.

• Why is Northern Rock experiencing problems?
• Northern Rock customer withdraw savings

Are Mortgage Lenders likely to go Bankrupt?

Northern Rock, is one of the UK's top 6 mortgage lenders. It has built its business around mortgage lending, rather than promoting building society accounts. Northern Rock has also been one of the most willing financial institutions to give unconventional mortgages. It has also taken on a significant amount of adverse credit mortgages.

However, yesterday it was announced that Northern Rock had to borrow from the Bank of England, using the "lender as last resort"

What does lending from the Bank of England Mean?

• Northern Rock were temporarily short of cash to finance its lending. This is because banks are much less willing to lend money to buy credit. This is due to the fall out from the US sub prime mortgage defaults
• Northern Rock is not as risk of going insolvent. It has £113bn of assets. The only problem is that these assets are illiquid - tied up in the value of houses. This is why it needs to borrow short term cash.
• Their difficulties in borrowing cash, is more a reflection of the conservative attitude to lending. As the Chancellor Alistair Darling said: "There is a lot of money in the system but they are reluctant to lend it to each other"
• For this emergency lending, The bank of England charged an interest rate 1% above the base rate. This makes the borrowing more expensive for Northern Rock. If this emergency borrowing becomes more common place it could make mortgages in general more expensive. (even if base rates remain the same)
• To summarise it is very unlikely that UK building societies will go bankrupt. Because the Bank of England is always willing to act as lender of last resort, people have confidence in the banking system and don't feel the need to withdraw money from their accounts.
• However, the global credit crunch will result in less attractive mortgages being put on offer. It will also become harder to get adverse credit mortgages

• Northern rock falls on fears of profit warning

Mortgage Equity Withdrawal UK 2006-2007

Current Trends in Mortgage Equity Withdrawal UK 2006-2007

Mortgage equity withdrawal has increases significantly in the past 6 years. In 2000 MEW accounted for just under 2% of personal disposable income. In 2003 this shot up to 9% of personal disposable income (£18bn). After a fall in the growth during 2004, MEW has again picked up in 2006. Bank of England



These trends in MEW are very closely tied to the performance of the UK housing market and also interest rates. The peak in 2003 a reflection of the historically low interest rates.

Prospects for Mortgage Equity Withdrawal in the UK.

There are fears that the UK house prices are overvalued. If house prices were to fall then it could lead to a significant fall in MEW. Also the recent rise in interest rates have made re mortgaging less attractive; the prospects for future interest rate rises remain.

See more on: Mortgage Equity Withdrawal

Defaults in UK and US Mortgage Industry

Is the UK mortgage industry likely to experience same problems of debt default as US mortgage industry?

Defaults on American mortgages have been making headline news recently with a record number of defaults; up to 4.95%. For the sub prime market this rate of defaults has reached 13%. Some are concerned that there are similarities between the American housing market and the UK housing market and in the future the UK could experience a similar level of defaults. However it is worth pointing out that there are differences between US mortgage industry and UK.

1. The number of 100% mortgages is much lower in the UK. 100% mortgages are quite rare, especially in the bad credit or sub prime sector. In the US 50% of sub prime mortgages were 100% mortgages

2. UK mortgage dealers are generally more risk averse. Even for self-cert mortgages there is more checking of income than in the US. See dangers of sub prime mortgages.

3. House prices are not falling. In the US many now have negative equity with no possibility of Remortgaging. Some believe the UK housing market is overvalued, however it is worth remembering that supply constraints in UK the may enable house prices to keep rising. see house prices to keep rising

4. Interest rates in the US have shot up sharply. US interest rates have increased from 1% to 5.25%; this is the main reason for loan defaults in the US. Interest rates have risen by more than people expected. In the UK interest rates move much more gradually. E.g. in the last 8 months there has been 3 increases of 0.25%

5. In the UK fixed rate mortgages are more common than in the US. These give additional security against rising interest rates.


However it is worth bearing in mind that

1. UK house prices could fall. The house price to earnings ratio is at an all time high and it has made it difficult for first time owners to buy. House prices could fall

2. UK consumers have a high % of indebtedness. This makes them susceptible to any future rise in interest rates.

3. The sub prime market in the UK is likely to grow. Figures by Datamonitor show 9.1 million people of working age were refused credit by mainstream lenders during 2005. In 2010 this figure is predicted to rise to 9.4 million.


Reference

Independent

More Defaults on American Mortgage

The troubled American Mortgage industry suffered a further set back yesterday with record levels of defaults. The concerns created in the US housing market set share prices tumbling over renewed fears of the prospects of an impending US recession

The Mortgage Bankers Association revealed that

4.95pc all loans tracked were in arrears of 30 days or more, the highest since the depths of the 2002 recession. Deliquencies on sub-prime loans have reached 13.3pc, even though the economy has barely begun to slow.

Furthermore with falling house prices US Federal Reserve governor Susan Bies said the problems in the sub prime mortgage industry would deepen. This is because many were bought on the assumption of rising house prices. For example some in the sub prime industry bought interest only mortgages, or got a mortgage with a heavily discounted period for first 6 months.

As house prices fall it makes it more difficult to deal with mortgage arrears