The Myth of Risky Mortgage Lending

HAMISH_MCTAVISH

Reports from both the Council of Mortgage Lenders (CML) and Standard & Poor's (S&P) shows that the proportion of borrowers with negative equity "is small".

However, both reports identified borrowers with equity of less than 10 per cent whose remortgaging options are likely to be limited and who could tip into negative equity if house prices fell.

S&P suggests around 14.5 per cent of mortgages were in this position at the end of the first quarter of the year. CML's research, based on post-2005 mortgages only and therefore not strictly comparable, suggested that about a quarter of these borrowers were in a position of either negative or less than 10 per cent equity.

Both reports identified substantial regional differences in the incidence of negative equity, with northern regions on the whole experiencing a higher proportion of cases.

The CML research suggests around a quarter of post-2005 mortgages are in negative equity in Northern Ireland, Yorkshire & Humberside, and the north east, compared with only around seven per cent in the south east and the south west.

S&P’s findings echoed the trend, finding that around 8.5 per cent of loans in the north were in negative equity at the end of the first quarter, against 2.5 per cent in the south.

On the positive side, CML's data showed that mortgage borrowers hold an estimated £800bn of unmortgaged housing wealth in their homes, even taking account of recent market conditions and the house price fluctuations of recent years.

The CML said: "Another way of expressing this is to say that the aggregate loan to value (LTV) ratio of mortgaged property is around 58 per cent - even allowing for the fact that house prices have fallen on some properties since the loan was taken out.

"This is an extremely conservative ratio, and firmly puts paid to the myth that the mortgage lending industry as a whole was indulging in risky high LTV lending as a matter of course, even in the boom conditions before the credit crunch.

"Taken together with the fact that most borrowers with negative equity are continuing to pay their mortgages in full and on time, and under the current low interest rate scenario may also be able to overpay and improve their equity position, the constraints imposed by negative equity in the market need to be kept in perspective.

http://www.ftadviser.com/FTAdviser/Mortgages/News/article/20110823/fea74658-cd92-11e0-94b8-00144f2af8e8/Small-proportion-of-borrowers-with-negative-equity.jsp

As previously stated on numerous occasions, UK mortgage lending was for the most part responsible, prudent, and had nothing to do with the banking crisis or credit crunch.

Good to see it confirmed, with just 8.5% of mortgages in the north in NE, and 2.5% in the south. And only 25% of mortgages taken out since 2005, so towards the top of the market, have less than 10% equity.

So much for the "irresponsible lending" myth.:)

OptionARMAGEDDON

Percentages are useless when not take into context with equivalent salaries to back the loan. Would you describe a pensioner with a 50% LTV mortgage and no salary a safe loan? I wouldnt. Nor would I describe someone as having a safe loan if their income did not match their 50% equity loan.

pqrdef

HAMISH_MCTAVISH wrote: »

This is an extremely conservative ratio

Is it? People have to pay their mortgages off sometime, if they want to be mortgage-free by the time they retire.

All the same, the availability of high-LTV mortgages for overpriced houses, especially "entry-level" houses, is bound to drive up the market.

macaque_2

HAMISH_MCTAVISH wrote: »

http://www.ftadviser.com/FTAdviser/Mortgages/News/article/20110823/fea74658-cd92-11e0-94b8-00144f2af8e8/Small-proportion-of-borrowers-with-negative-equity.jsp

As previously stated on numerous occasions, UK mortgage lending was for the most part responsible, prudent, and had nothing to do with the banking crisis or credit crunch.

Good to see it confirmed, with just 8.5% of mortgages in the north in NE, and 2.5% in the south. And only 25% of mortgages taken out since 2005, so towards the top of the market, have less than 10% equity.

So much for the "irresponsible lending" myth.

If lending leads to a situation in which borrowers have to be rescued with QE and low interest rates, it is patently irresponsible. In terms of the extent of negative equity, we are not in a position to judge this yet. House prices are starting to fall more rapidly now and it will take years before the full extent of the damage is known.

the_flying_pig

macaque wrote: »

If lending leads to a situation in which borrowers have to be rescued with QE and low interest rates, it is patently irresponsible. In terms of the extent of negative equity, we are not in a position to judge this yet. House prices are starting to fall more rapidly now and it will take years before the full extent of the damage is known.

yup. it's taken the life support of year upon year of the loosest monetary policy imaginable to cap the % of post-2005 mortgages in NE to "only" 25%.

just imagine how many would be in NE if we'd left things to the market.

Pimperne1

the_flying_pig wrote: »

yup. it's taken the life support of year upon year of the loosest monetary policy imaginable to cap the % of post-2005 mortgages in NE to "only" 25%.

just imagine how many would be in NE if we'd left things to the market.

Your signature may say "FACT" but your post is very from being a FACT.

DervProf

The CML says "everything is fine".

The Council of Mortgage Lenders. They represent mortgage lenders. Would they publish a report that their members were lending irresponsibly ?

I'm not saying that there was a lot of risky lending, but I'm sure that there was more than is being admitted. "Dodgy" lending, by it's nature, is going to be done behind closed doors.

And yes, if there was a lot of risky lending, why haven't their been more repo's ? I don't think I need to explain that one.

MacMickster

So to put it another way, despite over 30 months of ultra-low interest rates, a full quarter of borrowers who took out their mortgages over the last 6 years would be in negative equity if house prices dropped by only 10% - the situation being worst in those areas of the country likely to see rising unemployment due to public sector job cuts.

I'm very glad that you have successfully exposed that myth about risky lending practices.

Pimperne1

MacMickster wrote: »

So to put it another way, despite over 30 months of ultra-low interest rates, a full quarter of borrowers who took out their mortgages over the last 6 years would be in negative equity if house prices dropped by only 10% - the situation being worst in those areas of the country likely to see rising unemployment due to public sector job cuts.

I'm very glad that you have successfully exposed that myth about risky lending practices.

I don't think there are many people predicting a fall in house prices of 10%. Anyway, there is a difference between being in negative equity and not being able to afford your mortgage.

MacMickster

Pimperne1 wrote: »

I don't think there are many people predicting a fall in house prices of 10%.

Are you serious?

Graham_Devon

DervProf wrote: »

The CML says "everything is fine".

And they have been wrong so many times so far.

It's a bit like the blinding optimism Permisson put out at the begining of the year. Yesterday they took no notice of what they said then, and simply concluded that the market was tough and prices lower this year.