MSE News: The mortgage ticking timebomb

Martin

Finally a piece (link, thanks J_B: http://www.moneysavingexpert.com/news/mortgages/2009/11/the-mortgage-margin-scandal) that needs addressing (I have been banging on about this since the turn of the year, see my sig for a good example) - the scale of the profiteering dwarfs anything the energy companies are doing or indeed any bank charges.

However please take out the first example re 5 year fixes - it is simply not relevant to the argument and will allow many reading the piece to dismiss the whole thing out of hand.

Banks could argue that increased risk of price falls and hence negative equity require higher margins - and yet even 60% ltv mortgages have a huge margin priced in where the risk of the lender making a loss on default must be as close to zero as makes no difference - and surely with prices lower than before the risk of price falls is also lower?

However it is not all profit as cost of funds to the banks needs to be considered - funding mortgages using money martket funds is no longer considered a viable business model after what happened to NR and other forms of funding are more expensive (for example the best savings rates are now considerably higher than base compared to around base prior to the base rate paradigm shift) and the implicit profit made from virtually free funds in non / trivial interest rate paying current and instant access accounts is obviously much smaller in a low interest rate environment.

(Edit, thanks Wutang - Please take a deep breathe) My reading of the market is those banks with a strong capital position who are able to take advantage of the low money market funding rates (step forward HSBC and Santander) are laughing all the way to the 'bank' - excessive and embarrassing profits only being hidden by continuing write-offs else where in the organisations, weaker banks are to some extent using the profits to rebuild their balance sheets but are constrained by having to also raise capital from savers (the ones owned by taxpayers) and some organisations like mutuals who rely on savers funds are being squeezed (step forward Nationwide who are being doubly hit by honouring their 2% max svr to base rate difference promise). Given the reduction in competiotn in the market place no lender has any incentive to break ranks and offer more competive but less profitable products to build market share in a market that whilst profitable, exposure is not currently rewarded by the stock market.

It's pointless trying to engage with Mr Lewis on this one.

I have tried in the past and he simply washes his hands of any thought of championing the consumer cause here.

It seems his argument comes down to 'plenty of other people are raising the issue'.

His horizons are apparently limited to the let's-support-the brinkmanship-budgeters-bank-charges nonsense.

A shame but there you are.

An estimated 300,000 of its borrowers are paying a rate of just 2.5 per cent on their mortgages.
Nationwide says it is losing £450million a year on these home loans, because it is has to pay a higher interest rate to get the money in the first place - either from customer savings or by borrowing in the wholesale markets.

Read more: http://www.dailymail.co.uk/money/article-1229633/Nationwide-hit-pound-450m-loan-costs.html#ixzz0XWNFaCHB



.

Joe_Bloggs wrote: »

The Nationwide is a mutual society. It has a duty to redistribute the profits between the members. I am benefiting from their generosity by a voluntary reduction in a collared rate by 0.25% .
J_B.

So no plush carpeting and 20 people do each job (except serving at the cash desk) then, as at my local branch.

That kind of 'redistribution'...

The lack of competition in the mortgage market is increasing spreads between mortgage and money market rates. I can't see that this situation will improve until competition returns to the market, which is already happening to an extent. The profits on these mortgages are what will drive new entrants into the market.

Overall I would say that mortgage lending is still risky and will require large spreads as the houseprice outlook is still uncertain. I suspect the rates charged in the boom years mid 90s to 2007 were too low and so likely to return in the near future. Probably mortgages will need to trade at a quite a bit higher than swap rates to cover the risk of price falls, issuing debt, running branches and protecting security. The fact is that the risk of price falls and issuing debt have both risen over the past couple of years. But I wonder just how profitable mortgages were in the boom years and how many companies were pricing for market share.