Loans go bad as British housing bubble pops
When Shirley Hale’s husband dumped her for a younger woman and moved to the Czech Republic, Hale didn’t get mad. She got a new house.
After selling the family home in 2002, she bought a house in the suburbs of this old industrial city in northern England and took out a mortgage to fix it up. By last year, though, Hale had fallen behind on the payments on her “gorgeous little place” and was looking at foreclosure -- until a sales agent for a mortgage “rescue” company stopped in.
Hale signed over her house for $50,000 less than what it was worth. In return, she says, she was told she could live in it as long as she wanted if she paid the company $600 a month. Six months later, Hale learned her home had been sold and the mortgage transferred to one of Britain’s major sub-prime lenders. Hale had 28 days to get out.
“I don’t even know who owns it now,” Hale, 72, said wistfully in an interview in the tiny public-housing apartment she lives in now. “It’s empty still. . . . The garden shed has been stolen, all my built-in kitchen has been smashed to pieces, the wallpaper’s been ripped off. . . . They could have let me stay.”
The American sub-prime mortgage crisis has received attention worldwide, and European officials have been quick to blame lax U.S. oversight of lenders for the international credit crunch that has crippled banks and sent shock waves through the financial markets.
But Europe has its own burgeoning mortgage meltdown -- in Britain.
After years of watching house prices soar even faster than those in America -- modest three-bedroom tract houses in the London suburbs were going for $2.2 million at one point -- Britons are now weathering a sharp rise in mortgage defaults.
Moreover, many debt-laden homeowners have no means to salvage their properties because favorable loans are suddenly harder to get. Desperate consumers are increasingly turning to costly and confusing financial rescue plans that often end, later if not sooner, in the loss of their homes.
The Financial Services Authority, which regulates banking in Britain, warned last month that 1.4 million mortgage holders will face interest-rate resets on their loans this year, with payment hikes of up to $420 a month.
Repossessions -- the British term for foreclosures -- jumped 21% last year, with filings against more than 27,000 homes, according to the Council of Mortgage Lenders.
“There is potentially a huge number of people who may be in difficulties,” said Adam Sampson, director of Shelter, a nonprofit group that counsels homeowners seeking to avoid losing their houses to debt. “So many of the people we see are husbands and wives who have borrowed against both their incomes. . . . A substantial number have never had to verify their income to their lender.”
Because many borrowers have stretched themselves to the limit, Sampson added, seemingly minor economic changes such as less overtime or smaller bonuses might wreak havoc. “All of those things are able to tip them over,” he said.
And while few borrowers here are “underwater” on their loans -- meaning they owe more than their home is worth -- the trend in housing prices isn’t helpful. Forecasters expect a largely flat market this year, with some naysayers predicting a drop of up to 5%.
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British sub-prime
The Bank of England’s decision this month to drop its key interest rate a quarter-point to 5.25%, following a similar reduction in December, was hailed as a boon to homeowners facing rate resets. But many mortgage lenders, operating on thin margins in a competitive market and having trouble accessing cash in the tight credit market, have elected not to pass on the rate reduction.
As in the U.S., buyers with bad credit or low incomes are often steered into the sub-prime market, where the prevailing interest rate is around 9.5%.
Sub-prime loans account for more than 6% of all the mortgages in Britain. According to Standard & Poor’s, 23% of borrowers with such loans were behind on their payments in 2006, up 200% from the previous year.
A report this month by the Intermediary Mortgages Lenders Assn. indicated that although traditional prime lending still predominates, 30% of all home loans are in the category that includes sub-prime, made to buyers who offer no proof of income or to investors buying property to rent.
The FSA said the growing number of loans issued at high rates, over longer periods and for interest only, is “cause for concern.”
Still, sub-prime loans in Britain have features that may insulate the market somewhat.
For one thing, British law requires that borrowers pass a “stress test” to prove they can handle not only the low introductory rates but also the higher rates they could face when the obligation resets. And only about 15% of British sub-prime mortgages offer a discounted initial rate.
According to the British Council of Mortgage Lenders, British sub-primes also tend not to allow negative amortization, which lets borrowers make such low payments that their loan balances actually increase over time.
Moreover, British lenders have generally avoided “risk layering,” such as offering a high loan-to-value mortgage to people with bad credit histories.
And, unlike in the U.S., where mortgages are often made by one company, then sold to another -- a practice that can encourage risky lending because the firm that makes the loan doesn’t keep it -- British lenders largely hold on to mortgages they originate.
“In the U.K., the sub-prime market is smaller, and it is less inherently prone to problems,” said Bernard Clarke, spokesman for the council. “But clearly, when you’re dealing with mortgages to people who have credit-impaired histories, there is almost by definition a greater likelihood of problems in that tranche of mortgages. And that is going to be compounded by the credit crunch.”
Troubled borrowers can fall under the spell of the mortgage rescuers. Consumer groups say these homeowners have sometimes been browbeaten into exaggerating their incomes, lured into “rent back” schemes like the one Hale got into with no guarantee of long-term tenancy, assessed thousands of dollars in late payments and finally foreclosed on rapidly and forcefully when they couldn’t pay the new loans.
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Marked for default
Dawn Newbury, a mother of three in Cardiff, Wales, saw her payments rise from $1,510 a month to nearly $2,000 when her sub-prime loan’s interest rate reset. The lender immediately sought repossession when she fell behind. Newbury won a reprieve in court, but was hauled back when her payment fell $40 short of the minimum.
“The bailiff was out there, they were drilling through the locks in the back door,” said Newbury, 45. “My mother was standing there with her back to the door. If they’d have kept going, they’d have drilled right through her.”
Newbury found another sub-prime lender who paid off the first. She is now on an interest-only loan at $1,500 a month, which will soon go up to $1,910.
“And then the whole cycle’s going to start all over again,” she said. “They’re vultures, I’m telling you. They give you the money because they know you’re going to default, and they know they’ve got a lovely house coming out of it.”
British lenders say they welcome new codes of practice to keep out unscrupulous brokers but insist most lending occurs on fair terms in a market that still allows the vast majority of buyers to make payments and earn equity.
The recent alarms “do little to recognize the important role the sub-prime market plays in helping those with poor or damaged credit histories to enter or reenter the mortgage market,” the mortgage intermediaries association said.
Still, lenders’ rush to foreclose may be easing somewhat, Sampson said. Many learned in the British housing crisis of the 1990s that flooding the market with cheap foreclosures damps prices, leaving lenders with a portfolio of unpaid loans and assets declining in value.
“I think many lenders in the U.K. have learned that the most profitable way of dealing with mortgage arrears is to try to keep the borrower in the house,” he said. “That way, you have the greatest chance of recovering your debt.”
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