Moody's 40% house price falls, building socities in trouble.

brit1234

Building societies' financial ratings downgraded

Patrick Collinson
guardian.co.uk,
Wednesday 15 April 2009 15.14 BST

Building societies holding the accounts of millions of British savers were savagely downgraded to near junk-bond status by ratings agency Moody's today.

In a shock warning that the sector is heading for potentially massive losses from the housing market crash, Chelsea Building Society, which has around half-a-million savers and 90,000 mortgage borrowers, saw its bank financial strength rating (BSFR) slide from C to E+. West Bromwich, the seventh largest society with £9.6bn in assets, fell from C- to E+.

Britannia, Newcastle, Norwich and Peterborough, Principality, Skipton, and Yorkshire building societies were all downgraded from ratings in the C band to the riskier D band.

Moody's blamed the downgrades on an assessment that the global financial crisis will lead to "significantly higher credit losses than previously anticipated", particularly in the buy-to-let and self-cert markets, which it said are likely to come under "considerable pressure".

It tested the societies on a base scenario that house prices in Britain will fall by 40% from peak to trough, and concluded that such falls will place severe pressure on the lenders' capital positions.

The societies reacted furiously to the move. A spokesman for Chelsea Building Society said the ratings agency was overreacting after its own failure to spot the unfolding credit crisis in 2007-08.

He said: "Your money is safe at the Chelsea. There is no suggestion that the society is in any difficulty. This is a knee-jerk reaction by Moody's to the situation it found itself in last year. We are a £14bn organisation with £4.5bn in liquid assets."

Chelsea said it had passed the stress tests set by the Financial Services Authority (FSA) and had benefited from strong savings inflows over the past year. In addition, it said its arrears and repossessions had stabilised in recent months.

Capital concerns
The Moody's report was compiled by Marjan Riggi, the agency's lead analyst for UK mortgage lenders. He said: "The key concerns for mortgage lenders in the UK remain the amount of capital available to absorb the upcoming losses, especially those arising from specialist loan books (typically self-certified loans, buy-to-let loans, second-lien loans, or purchased loans), and commercial real estate loans where concentration risks are high."


The giant of the building society sector, Nationwide, saw its rating reduced from B to C-. Moody's also reduced the rating of Alliance & Leicester to E+ from C+, despite the bank now being part of Santander.


The Building Societies Association said the methodology used by Moody's was "over pessimistic". Spokeswoman Rachel Le Brocq said: "We are very surprised and disappointed with the downgrades. It is based on a very pessimistic house price scenario. Savers should not be worried. The societies have weathered the storm of the financial crisis better than other institutions and are fundamentally strong, although not of course immune."

Norwich and Peterborough's chief executive, Matthew Bullock, said the society is "awash with cash" after a particularly successful Isa season. He said the society's buy-to-let lending was just 12% of the total and was performing in line with the main residential business.

"Our arrears and repossessions actually fell last month," he said. "We have had our stress testing by the FSA and they are very comfortable that we have enough capital. We feel this Moody's report is about a lowering of most boats in the harbour."

http://www.guardian.co.uk/money/2009/apr/15/building-societies-downgraded



All this risky over lending on mortgages as prices plumet is going to haunt the building societies . We have years of falls yet to go and we are losing about 1 building society a month at the moment.
:eek:

Really2

brit1234 wrote: »

It tested the societies on a base scenario that house prices in Britain will fall by 40% from peak to trough, and concluded that such falls will place severe pressure on the lenders' capital positions.

:eek:

You best change your signature then;)

50%+ Falls in House Prices by Christmas 2009

mewbie_2

It's like finding out the church has been involved in thieving. I mean, building societies - what safer possible place to put your money could there be? The model is for local people to save money, and every now and then one of them borrows against those savings in order to buy a property.

A few short years of madness has taken down virtually everyone.

Radsteral

Moody / standard and poor etc of these rating companies should just g stand back and have jacket patato for breakfast/lunch /dinner.

I wonder who could believe the very same agencies who just a year ago where listing half of the bussineses as ''bullet proof'' and 120% safe fron anything.

I think they have the right to do analysis and throw them in the daily papers but i doubt any could take note of them..

ad44downey

This story has just been reported on the news saying that Building societies had ventured into the murky worlds of self-cert mortgages and buy-to-let. And are now paying the price of this folly.

Gorgeous_George

There is certainly more pain to come but the Building Societies will do much better than the banks.

If problems do persist then at least we can look forward to years of low interest rates. Taxes will rise and benefits/pensions will be slashed but interest rates will have to stay below 2%.

GG

Thrugelmir

Gorgeous_George wrote: »

There is certainly more pain to come but the Building Societies will do much better than the banks.

If problems do persist then at least we can look forward to years of low interest rates. Taxes will rise and benefits/pensions will be slashed but interest rates will have to stay below 2%.

GG

The cost of money borrowed will not only reflect the actual wholesale interest rate but will include the risk premium and levies required to cover the cost of default.

Everytime a financial institution fails its retail depositors the remaining ones will pick up the tab.

As there are fewer lenders in the mortgage market now and those that are left need to rebuild their balance sheets. Its easy to see them collectively raising lending rates to a highly profitable margin.

nobby24

Apart from a crazy desire to lend people as much money as they wanted the other 'banking' fiasco was the crazy 'buy to let' extravaganza. In my home town I couldn't believe all the massive apartment developments springing up everywhere! This isn't a recession/depression, it's a self created banking catastrophe.

Newbird

Thrugelmir wrote: »

The cost of money borrowed will not only reflect the actual wholesale interest rate but will include the risk premium and levies required to cover the cost of default.

Everytime a financial institution fails its retail depositors the remaining ones will pick up the tab.

As there are fewer lenders in the mortgage market now and those that are left need to rebuild their balance sheets. Its easy to see them collectively raising lending rates to a highly profitable margin.

Yes, granted that lenders have had to rethink their ideas, and get to being more responsible but, I'm thinkin out loud here.. its not as simple as that is it? surely if rates go up a lot to ....lets say 'where the lenders want them to be' (speculate away folks) without any reality check, won't this mean that along with predicted rising inflation, we would then not be able to afford to eat or pay our mortgages, what with no pay rises and mass unemployment kicking in as well as inflated food and import costs, so won't those who have just about managed to get a mortgage today find themselves unable to pay/sustain these new high rates tomorrow and get repo'd?

Isn't that what the lenders would be risking by ramping up rates too fast to try to re-build their profit margins quicker at the expense of the ordinary Joe, and how does that help the lenders or the property market to recover? or for us ever to see the turning point?

Or am I missing something major here? huh?

Generali

ad44downey wrote: »

This story has just been reported on the news saying that Building societies had ventured into the murky worlds of self-cert mortgages and buy-to-let. And are now paying the price of this folly.

Also, I believe that some have invested in these 'dodgy debt packages'. The BoE is taking care of that problem for now but may not indefinitely.

Thrugelmir

Newbird wrote: »

Yes, granted that lenders have had to rethink their ideas, and get to being more responsible but, I'm thinkin out loud here.. its not as simple as that is it? surely if rates go up a lot to ....lets say 'where the lenders want them to be' (speculate away folks) without any reality check, won't this mean that along with predicted rising inflation, we would then not be able to afford to eat or pay our mortgages, what with no pay rises and mass unemployment kicking in as well as inflated food and import costs, so won't those who have just about managed to get a mortgage today find themselves unable to pay/sustain these new high rates tomorrow and get repo'd?

Isn't that what the lenders would be risking by ramping up rates too fast to try to re-build their profit margins quicker at the expense of the ordinary Joe, and how does that help the lenders or the property market to recover? or for us ever to see the turning point?

Or am I missing something major here? huh?

The banks are already pre-empting the future by only offering their best deals to FTB's with large deposits or existing borrowers with sizable equity.

The banks factor in repo's and defaults into their lending books. When you've got a couple of billion lent out. Squeezing .25% additional interest from your borrowers adds plenty of cover for defaults.

The property market will find it's level. Supply and demand will see to that.

The return to health of the banks is of more benefit to the nation as a whole than the interests of those with mortgages. ( I do have a mortgage myself I should add). As savers do outnumber borrowers by 7:1.