FSA warns on levels of UK mortgage debt

worldtraveller

UK borrowers are ramping up their mortgage debt to levels not seen since the financial crisis, putting them and possibly the larger banking system at risk if interest rates rise, the chairman of the Financial Services Authority has warned.

Lord Turner said that 28 per cent of new UK residential mortgages in 2010 were for amounts greater than 3.5 times the borrowers’ income, a level not seen since 2007.

Banks are trying to protect themselves from losses by requiring higher downpayments. But the high loan-to-income multiples and widespread use of variable rates means borrowers could easily run into trouble making their repayments in the case of unemployment or if interest rates rise, he said.

“That creates a vulnerability,” he said on Thursday, as the FSA unveiled its annual Prudential Risk Outlook, a closely watched document in which the watchdog predicts likely sources of trouble for the banking sector.

FT

angrypirate

I thought Hamish said we were returning to normal levels of borrowing though?

Shupufski

angrypirate wrote: »

I thought Hamish said we were returning to normal levels of borrowing though?

Yes, but he believes that abnormal lending is the norm. Or rather he wishes for it.

doire_2

People never learn

edinburgher

People never learn

Sad but true. We're looking at no higher than 1.76x combined income when we buy, although apparently we can 'afford more'. Stuff 'affordability' - we'll pay what we feel confident managing sustainably over the next 15-20 years!

puddy

so only a third of new mortgages are for amounts over 3.5x income, so could be for 4x income, which doesnt sound a great deal to me?

Conrad

The FSA are the biggest impedement to an economic recovery right now. The sooner these out of touch faceless bureacrats are disbanded by the Tories the better. Everyday I see mature adults declined for mortgages due to Nanny knows best FSA rules, for example where the applicant is over 55 and cannot commit to a short term to age 65 (restricted to this age due to not having a gold plated pension). In the past 99% of owners kept thier homes, yet Nanny knows better than a free thinking mature adult who in the past would have managed beyond 65 / met a new partner / let a room / downsized.

Myself and my contemporaries borrowed 3.5 - 5 x income with much higher interest rates AND 99% KEPT OUR HOMES. All this smug nonsense about 3 x income, yet the real pricture is that the vast majority do not get into trouble.

No recovery until these utterly out of touch fools are removed, which I suspect will not be too long now.

ILW

Conrad wrote: »

The FSA are the biggest impedement to an economic recovery right now. The sooner these out of touch faceless bureacrats are disbanded by the Tories the better. Everyday I see mature adults declined for mortgages due to Nanny knows best FSA rules, for example where the applicant is over 55 and cannot commit to a short term to age 65 (restricted to this age due to not having a gold plated pension). In the past 99% of owners kept thier homes, yet Nanny knows better than a free thinking mature adult who in the past would have managed beyond 65 / met a new partner / let a room / downsized.

Myself and my contemporaries borrowed 3.5 - 5 x income with much higher interest rates AND 99% KEPT OUR HOMES. All this smug nonsense about 3 x income, yet the real pricture is that the vast majority do not get into trouble.

No recovery until these utterly out of touch fools are removed, which I suspect will not be too long now.

Ah

So the whole economy is reliant on people taking out loans to buy houses.

Wookster

Conrad wrote: »

The FSA are the biggest impedement to an economic recovery right now. The sooner these out of touch faceless bureacrats are disbanded by the Tories the better. Everyday I see mature adults declined for mortgages due to Nanny knows best FSA rules, for example where the applicant is over 55 and cannot commit to a short term to age 65 (restricted to this age due to not having a gold plated pension). In the past 99% of owners kept thier homes, yet Nanny knows better than a free thinking mature adult who in the past would have managed beyond 65 / met a new partner / let a room / downsized.

Myself and my contemporaries borrowed 3.5 - 5 x income with much higher interest rates AND 99% KEPT OUR HOMES. All this smug nonsense about 3 x income, yet the real pricture is that the vast majority do not get into trouble.

No recovery until these utterly out of touch fools are removed, which I suspect will not be too long now.

Touch of sour grapes here?

I've yet to see a convincing argument as to why it would be a bad thing for borrowing to fall back into line with long term trends.

CloudCuckooLand

Interesting additional commentary in the FSA Outlook document;

http://www.fsa.gov.uk/pages/library/corporate/pro/index.shtml
http://www.fsa.gov.uk/pubs/other/pro.pdf

Credit risks on UK household lending [FONT=Sabon,Sabon][FONT=Sabon,Sabon]Credit losses on unsecured lending to UK households have so far been significantly greater than those on secured lending. Low mortgage interest rates and lower-than-expected unemployment amongst mortgage borrowers have helped to limit mortgage arrears and repossessions. Within this overall favourable picture, however, it is important to note three caveats. First, lender forbearance might be, at least to some extent, disguising the scale of problems; second, experience varies significantly by region and customer segment; and third, the picture may change, particularly when interest rates rise. [/FONT][/FONT]
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Section The low interest rate environment [FONT=Sabon,Sabon][FONT=Sabon,Sabon]Since the crisis, low short-term interest rates have been vital to financial stability, reducing debt servicing costs, underpinning asset prices, and limiting credit losses. But low interest rates themselves create new risks and returning to more normal rates generates others. For firms, the impact of low interest rates on margins has depended on the mix of their assets and liabilities, the extent to which interest rate risks were hedged out when loans were originally put on the books, and the balance between back books and new lending volume. The steep yield curve provides a strong incentive to borrow short term or at floating rates. Experience during previous periods of monetary tightening, such as in 1994, shows that such positions involve significant risk. Even if they do not take on significant interest-rate risk themselves, firms may face higher credit risk if their customers have become more exposed to rising interest rates. In addition, low short-term interest rates increase the risk that customers seek unsustainable levels of total indebtedness. [/FONT][/FONT]
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[FONT=Sabon,Sabon][FONT=Sabon,Sabon]Our key messages to firms include: • in their stress testing of both banking and trading books, firms should prepare for a range of interest-rate scenarios; and • in their credit assessments, firms should assess the vulnerability of their customers to rising interest rates. [/FONT][/FONT]
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Lender forbearance [FONT=Sabon,Sabon][FONT=Sabon,Sabon]It is possible that increasing lender forbearance is an additional factor keeping reported defaults at modest levels. Lender forbearance will often be an appropriate response to customers experiencing temporary financial difficulties to help them stay in their homes. We do not have data to compare levels of forbearance today with the 1990s recession. However, the lower interest rate environment combined with the steeper falls in house prices during this downturn mean that lenders have stronger incentives to exercise forbearance than in the early-1990s. [/FONT][/FONT]
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Many loans where lenders are exercising forbearance do not show up in arrears figures reported to the Council of Mortgage Lenders or the FSA: for example, a temporary or permanent transfer of a mortgage onto interest-only terms, extending the term of the mortgage, and agreeing reduced payments or payment holidays with a borrower. Reported arrears figures should, therefore, not be regarded as a complete measure of the underlying levels of loan impairment

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Conrad

ILW wrote: »

Ah

So the whole economy is reliant on people taking out loans to buy houses.

Not at all, but sentiment is severly impaired when half the population has it's autonomy and aspiration cut off at the knee, and facing an indeterminate period of renting.

This cap on aspiration feeds through into the wider economy. Sure we can grow the rental sector like the Germans, but it's none the less a shock to average Brit and will take time to get used to, too much time if we want a wider recovery any time soon.