MSE News: The mortgage ticking timebomb

moneysavingobsessive

I (quite unusually) come down on the side of the banks here.

The assumption that new mortgages are uncompetitive because the rates have not moved in line with base rate falls relies upon 2 assumptions:

1. That banks fund at base rate (which is not true for mortgages as others have pointed out, it tends to be 2yr swap rates which are considerably higher and relatively illiquid at the moment).

2. More importantly that the rates on offer 2 or 3 years ago were "reasonable" rates. What the crisis has shown is that banks were not pricing their risk correctly (there is in theory nothing wrong with lending to "sub-prime" borrowers if you price in the correct probability of default).

This mis-pricing included so-called prime mortgages. So although there may be an element of excessive spread at the moment, I think that there is an arguement to be made that actually we had it too good before. If you go back over a longer time horizon (say 15yrs) a 5% ABR mortgage was probably about average.

Batchy

The real problem is, you can't have things best both ways... having your cake and eat it just isnt possible, for banks to exist they need to make money!

People critically point abuse at the banks for not being prudent in the past hence causing the situation, now they are being overly prudent as a result to 1) recover the situation and 2) make the future more secure and prudent, as a result making the recovery more difficult than it should have been if there wasnt a credit crunch in the first place, for individuals, small business and big business, they are being thrown anger again by the same people, for doing exactly as they wanted originally although no one shouted about it at the time, most just took advantage of it.

Its the same for most business's everywhere, the biggest problem is some big banks made big aquisitions on the back of this prosperity, and now they have double the pain as a result, the money they put aside for a rainy day was consumed making the growth/ acquisitions, as they wasn't DOING anything with the money they were sitting on.

Those banks that consolidated their balance sheet and were prudent should be sitting pretty, probably why Barclays seem to have profited from all this making some rather sweet aquisitions in the mess.

SANTANDER, made all their growth in the mess and fall out... they IMO are sitting pretty, but had their pain to deal with too. But the companies they took on, almost helped the mess. It was smart, they brough deposits and not liabilities.

What I don't understand is until we get NEW banks coming into the market, forcing competition to tighten up, these new banks would not have the PAIN to recover from than others do, and would therefore give consumers the best deal currently.

People on the MSE forums and board, want Higher than Base interest on bank saving accounts, but lower than base interest rates on mortgages and loans and credit cards... These rate junkies are the problem. When you align expectations with reality, you get stability.

IMO, all the instuments and different types of account on offer are ridiculous. All rates should be tied into BANK OF ENGLAND BASE, so they (THE BOE) have control over the economy. Banks giving high amounts of interest on savings just prevent people being motivated to spend, which is the BOE intention when they lower rates. Its not just to help mortgage payers by lowering their rates and increasing money in their pocket, I would have thought most mortgages were fixed and the few trackers prosper in the good times by OVER PAYING the mortgage anyway, rather than buying a new car on credit etc.

Its all been madness as it wasnt controlled and its not open to new entrants, its a closed shop and probably will be forever. THE BOE need power back in their hands, and the chancellor who let this mess build up over the last 10 years needs to be brought before a commission, as to why he never did his job ie Gordon Brown, by taking responsibility or delegating and giving the power to do so to those delegated with the responsibility ie FSA or BOE.

No wonder he wanted Tony Blair out so keenly so he would be chancellor when the cr*p hit the fan!!!

sukey13

I am probably oversimplyfing things but K.I.S.S.

The banks need to start lending again, as how else will they make more money? So eventually they will have to increase LTVs available and better fixes or noone will start buying houses again and noone will move from their competitors to another bank when they remortgage.

Supply and demand... ? [off to hide...]

BTW, Martin, I think this article is about a year too late. I believe that this is what everyone has been worrying about - what is going to happen to mortgage rates, will they be able to keep their roof over their head? Obviously you being a millionaire, probably aren't that concerned as I bet you dont have a mortgage

MSE_Martin

LizEstelle wrote: »

Why the sudden conversion, Martin?

I approached you on this issue over 3 months ago and you seemed none too keen to get involved:

"Yet frankly this is a massive issue that lots of people deal with all the time - for me to join in and put resource to it is like throwing a pebble in the sea to try and cause waves - i prefer to use my resources where they can have an impact."

Ring a bell?

Or, perhaps this new article is meant for 'internal consumption' only and is not the start of a new campaign..?

It would be good to think that someone of your public profile might finally start giving the lenders a tough time on this festering sore of their fixed rates. As you now say but would not acknowledge back in August, people with influence are doing precisely 'nowt' about it, so it would be high time this received some very welcome publicity.

Its not a conversion - i doubt i wil lhave much impact with this - but it is an interesting issue - so i thought worth writing about here and in my telegraph column this week. Yet its a tale worth telling.

Radiantsoul

MSE_Martin wrote: »

Its not a conversion - i doubt i wil lhave much impact with this - but it is an interesting issue - so i thought worth writing about here and in my telegraph column this week. Yet its a tale worth telling.

It is an interesting story, but the solution is likely to be higher profits in mortgages encouraging falls in spreads.

Radiantsoul

moneysavingobsessive wrote: »

2. More importantly that the rates on offer 2 or 3 years ago were "reasonable" rates. What the crisis has shown is that banks were not pricing their risk correctly (there is in theory nothing wrong with lending to "sub-prime" borrowers if you price in the correct probability of default).

This mis-pricing included so-called prime mortgages. So although there may be an element of excessive spread at the moment, I think that there is an arguement to be made that actually we had it too good before. If you go back over a longer time horizon (say 15yrs) a 5% ABR mortgage was probably about average.

I agree with this. I think competition and the race for market share drove rates too low and the rapid house price inflation helped to reduce the risk in mortgage lending. Competition has lowered and falling or stagnate house price means banks need peopel to be in a position to repay their mortgage rather relying on the house being remortgaged, sold or repossessed.

michaels

I think there is a lack of competition meaning that at some levels of risk new business for the banks is highly profitable - a 50% ltv mortgage has negligible chance of loss on default so why are rates for such mortgages so much higher than libor? Yes the banks need a capital cushion which costs more than libor but this is still only for a few % (max 10?) of their loan book so the majority of funding could be sourced at libor. I can't beleive that banks fund floating rate (tracker and svr) mortgages of 2 year swaps - surely this would bemuch to risky?

new_home_owner_3

this was discussed before and this was a few months ago.

http://forums.moneysavingexpert.com/showthread.html?p=23903299#post23903299

opinions4u

michaels wrote: »

so the majority of funding could be sourced at libor

No it couldn't. Their is still a shortage of funds out there and as such each bank's borrowing on the money markets has a risk premium priced in. HSBC and Santander will most likely have the lowest risk premium added on to the LIBOR rate with others being charged (in some cases) an extra 2% plus.

I can't beleive that banks fund floating rate (tracker and svr) mortgages of 2 year swaps - surely this would bemuch to risky?

They fund it with whatever they can get their hands on at the moment. I believe the average savings book costs around 2.5%+ to maintain interest to savers. The higher rates we see on 2 year+ fixed savings accounts actually explain the difficulty banks are having raising wholesale funds for longer than 12 months.

As for Swap rates these are currently higher than 6 months ago but lower than a year ago for 2,3 and 5 year lending. But, again, each individual bank has to pay a risk premium over and above the rates in the link and you when then expect to have to price in a margin for staff costs, shareholder profit and, most importantly, the risk of losses.

It is this risk of losing money by lending which is predominantly responsible for the widening of margins. A margin ain't that wide if a third of your profits are wiped out thanks to bad debts.

Thrugelmir

Martin, whilst your argument is well made.

If I was a mortgage provider. Where could I borrow £5 billion at 2% as you quoted in your article as the going swap rate.

The lender could get a better return by investing Government securities.

The LLoydsHBOS Group quoted around 3.8% as the average rate of their mortgage funding across the whole group as at the 30th June. As they control in the region of 29% of UK mortgage lending. That must be a fairly representative figure for the market.

On a personal note I have a life time base rate tracker, .35% above base. So my lender is losing money on my business. Somebody else has to compensate for this.

The mortgage market will take some years to resume to "normal" conditions. As the excesses of the past need to be washed out of the system.