MSE News: Interest-only mortgages could be 'thing of the past'

gingeralan

jamesd wrote: »

TO get an idea of the scale it's good to look at page 32 of the FSA's 2010 Mortgage market Review proposals. That has a graph that shows the large bulge in interest only mortgages becoming due for repayment between 2028 and 2032 that were started around 2005-9. The peak is around four times the usual level. Anyone who's stuck with this discussion might find reading or at least scanning the FSA proposals interesting.

It's definitely not too late. Some things that can be done:

1. lenders can regularly review repayment vehicle plans, perhaps every five years, and offer advice and assistance to anyone who looks to be in trouble.
2. we can observe that between now and 2027 the inflation target of 2% would normally produce 3% a year wage increases that over the 15 years to 2027 would increase pay even without promotions by 56%.

The combination of those two things means that in most cases the lenders are likely to be able to prompt those who aren't on track to increase payments to repayment vehicles or slowly switch parts to interest only using the higher incomes compared to mortgage balance.

Some will. My mortgage payments are usually less than my Council Tax payments. The payment would have to increase by ten times to start causing me any sign of trouble if I still have a job if I had nothing in my offset account. If interest rates did rise so my mortgage interest rate was 30% I'd just move money into my offset account and pay no mortgage interest at all. That risk mitigation is part of why I chose to get an offset mortgage.

There's a huge variety of interest only borrowers out there. Some are stereotypical stretched first time buyers, many aren't.

Page 32 only considers those nurturing into retirement, I haven't got the time to wade through 182 pages of report, so I imagine that there are many more whosei/o mortgage is expects to finish before they retire.

jamesd

RenovationMan wrote: »

I'd argue that someone on £60k could afford more than twice as much as someone on £30k. A lot of the expenses are the same for both people, such as gas, electricity, water, food, clothing, travel costs. Someone on £30k could spend 50% of their income on these necessities whereas someone on £60k might be spending 25% of their income on the same things.

They can. This is why the FSA rejected an income multiple cap. They observed that those with higher pay have a higher percentage of pay as available income and that:

"a. LTV ratios are a relatively consistent predictor of default;
b. LTI ratios are not a strong or consistent predictor of default;"

On page 23 they give a table that shows how to calculate free disposable income that can be used to calculate what is affordable, with some discussion on the previous page.

Anyone who doesn't already know who's most likely to be in arrears or repossession could usefully look at the table on page 44 which shows the combinations with highest failure rates. Worst is credit impaired LTV over 80 self-employed borrowers doing debt consolidation who have a 42% trouble rate. Interest only isn't in the top 12 in that table, all are credit impaired cases. So if you wondered why those with credit record issues have any trouble getting a mortgage, that helps to explain it.

jamesd

gingeralan wrote: »

Page 32 only considers those nurturing into retirement, I haven't got the time to wade through 182 pages of report, so I imagine that there are many more whosei/o mortgage is expects to finish before they retire.

That should have been page 34, I've corrected my post. You seem to have looked at page 30. Using the numbers at the bottom of each page.

You may not want to read the report but I have, along with its predecessor. Maybe you'll have more data on which to base your points if you do some background research and reading?

Earlier you mentioned property prices and blamed that for the bank bailouts. That wasn't the cause. What caused the need for bailouts was effective closing of the money markets. The lenders like Northern Rock who used short term money market borrowing to fund long term mortgage lending were unable to refinance their loans and collapsed. RBS did some of that but less than Northern Rock so it suffered less as a percentage of borrowing. Building societies that followed their tradition of lending from savings suffered least overall. Borrowers getting into trouble here was some background to that but it wasn't the cause of it, that was over in the US.

gingeralan

jamesd wrote: »

That should have been page 34, I've corrected my post. You seem to have looked at page 30. Using the numbers at the bottom of each page.

You may not want to read the report but I have, along with its predecessor. Maybe you'll have more data on which to base your points if you do some background research and reading?

Earlier you mentioned property prices and blamed that for the bank bailouts. That wasn't the cause. What caused the need for bailouts was effective closing of the money markets. The lenders like Northern Rock who used short term money market borrowing to fund long term mortgage lending were unable to refinance their loans and collapsed. RBS did some of that but less than RBS so it suffered less as a percentage of borrowing. Building societies that followed their tradition of lending from savings suffered least overall. Borrowers getting into trouble here was some background to that but it wasn't the cause of it, that was over in the US.

Anyone who thinks it is sensible to borrow some money tell them they'll pay it back in a week then lend it out for a month on the expectation they'll be able to roll the debt over is absolutely bonkers.

Why did they start doing this? Because house prices came too high. They didn't have the funds available internally and instead of refusing to lend they just gambled with our money! Leveraged lending against leveraged assets brilliant.

Do you are telling me that the failure of the short term wholesale finance system had nothing to do with excessive lax lending policies encouraged by i/o mortgages etc.

When my parents took out their first mortgage they had to go and see the bank manager who made certain they understood the commitment they were taking. I was initially considering buying a house about 8 years ago, there was no real mention of this, I was actually asked if I wanted to borrow more!

The short term wholesale market is supposed to be just for that, not to allow banks to lend more than they should. The whole banking industry needs proper regulation as I have said before the financial industry had proven itself incapable of acting in a responsible manner.

If they were just allowed to go bankrupt when they messed up I would agree, but they weren't and probably never will be. So whole my taxes are going towards bring the back stop for these organisations I expect some input into how they operate and by this I mean appointing a proper regulator who will act when these large organisations start screwing up or taking excessive risks.

jamesd

gingeralan wrote: »

Anyone who thinks it is sensible to borrow some money tell them they'll pay it back in a week then lend it out for a month on the expectation they'll be able to roll the debt over is absolutely bonkers.

Right. It looked like a good idea at the time... It was really one to three year loans in batches and as each batch became due for repayment they found that they couldn't borrow more to repay that less the amount that mortgage borrowers had repaid. So massive liquidity crunch as they ran out of readily available money. The mortgages might or might not turn out to be good but that wasn't what caused the major trouble, it was just running out of money short term.

gingeralan wrote: »

Why did they start doing this? Because house prices came too high. They didn't have the funds available internally and instead of refusing to lend they just gambled with our money!

That wasn't the main reason. The real reasons were:

1. It was cheaper than long term money. More profit and lower interest rate for consumers - try borrowing at Bank Rate today as you could then.
2. It allowed lenders who had no deposit taking business to lend. They could lend then sell on the mortgage book as well, further reducing their need for deposit money.
3. For some lenders it allowed them to lend more than their deposit amounts, close to your thought but house prices weren't the main driver, it was a search for higher market share and profits.

gingeralan wrote: »

Do you are telling me that the failure of the short term wholesale finance system had nothing to do with excessive lax lending policies encouraged by i/o mortgages etc.

Right. Nothing at all to do with that in the UK.

The problem originated in the US where they have a system like this:

1. Borrowers can walk away from the mortgage and owe nothing - negative equity, just walk away leaving the bank with the bill. Not here, here you still owe the difference between repossession sale price and borrowing.
2. Many lenders just do lending and underwriting then sell on their whole mortgage book every few months on the mortgage-backed securities market, a relatively new market. Because they were selling the whole book they had no financial exposure to defaults and hence no financial incentive to lend responsibly. Why care if a borrower defaults if you already have your profit and don't lose anything? Shame about the banks who bought the securities...
3. That very irresponsible lending, worse than even the worst of UK standards, led to high defaults. So did troubles with the models used to predict how bundles of say 300,000 mortgages would behave in default terms.
4. Those things combined to cause a major failure and large losses in the US mortgage backed securities market.
5. Then regulators in the US failed to save one major US holder of those securities and it went bust in one of the largest bankruptcies in US history.
6. And that was so messy that people who had money with it found that they couldn't get at it and couldn't be sure how much they would get back or when. Which caused the short term money markets to dry up and Northern rock et al to fail.

There is still trouble in the market in Europe and even today we are seeing banks putting their money with the ECB instead of lending it overnight or for a few weeks or months to other banks. This is mostly due to the Eurozone issues though, largely the Greek membership of the Eurozone based on falsified application information at the moment.

gingeralan wrote: »

When my parents took out their first mortgage they had to go and see the bank manager who made certain they understood the commitment they were taking. I was initially considering buying a house about 8 years ago, there was no real mention of this, I was actually asked if I wanted to borrow more!

Like me you were borrowing far less than you could afford, making you a good risk compared to some.

gingeralan wrote: »

The short term wholesale market is supposed to be just for that, not to allow banks to lend more than they should.

It's also used by normal larger companies for borrowing.

gingeralan wrote: »

The while sudden needs proper regulation as I have said before the financial industry had proven itself incapable of acting in a responsible manner.

Some parts of it. Not all. But the better parts suffered because of the bad parts. Increased capital requirements are part of the remedy, so is the FSA lending proposals that I've discussed (banning lending without verifying income, say).

gingeralan wrote: »

If they were just allowed to go bankrupt when they messed up I would agree, but they weren't and probably never will be.

Regulators are working on trying to eliminate the too big to fail issue or impose much tougher requirements on the ones that are too big to allow to fail. But do remember that if they fail it's our pension schemes and investments that will lose our money because we are the owners via those things.

gingeralan wrote: »

So whole my taxes are going towards bring the back stop fir these organisations I expect some input into how they operate and by this I mean appointing a proper regulator who will act when these large organisations start screwing up or taking excessive risks.

One of the nice things about central bank interventions is that the bank buys near low prices so there's a reasonable prospect of a central bank making a significant profit on the deal if it's allowed by politicians to be patient. The liquidity operations are profitable, the bailouts not so much or not at all yet.

RenovationMan

A really indepth and informative post jamesd, but one that will fall on deaf ears. The whole premis of mortgage multiples is not to prevent people from overstretching themselves but to control the price of houses.

This is the reason these guys keep avoiding the question about how mortgage multiples will prevent the indebted from borrowing too much. They don't care about that, they want house prices to fall, pure and simple and this is why their arguments don't make any logical sense.

They hate IO mortgages not because they are worried about people not having repayment vehicles they blame IO for moving house prices out of their reach.

They hate mortgage lending based on affordability not because they are worried about people overstretching themselves but because they blame affordability for moving house prices out of their reach.

They can't get past this. They refuse to contemplate the checks and balances that could simply and easily be implemented to existing procedures to make sure people don't overstretch themselves - the regulation being proposed by the FSA and discussed by ourselves on this thread. They refuse to contemplate it because it would only affect a small minority of people, preventing them from overstretching themselves. They want measures to affect and rein the entire housing market and hope that salary multiples will do it.

mic200202

Just my tuppence worth on the FSA proposals (let's remember they are just proposals).While much of the recent paper seems to make sense there are many weakness's in the data and the interpretation the FSA has put on things.The basic thrust of most of the data is that consumers overstretched themselves (mainly in the years around 2007) and that some mortgages were unaffordable.

The weakness in the report overall is that the FSA have almost completely ignored the impact of recession on affordability.They argue this away by stating that most unemployment has occurred in the younger age groups who don't have mortgage exposure.Quite incredible but true.They have also chosen to ignore the impacts of dramatic increases in the costs of heating,petrol,food and a number of other areas.Instead they focus solely on the mortgage itself as being unaffordable at outset.

The FSA by its own admission does not have a lot of data prior to 2004 when they started regulating mortgages.Most of the detail is therefore naturally concentrated on very recent data.While they do show arrears levels in certain types of mortgage the lack of historical context (ie over the entire mortgage book held at a particular time) means they could be analysing too small a sample over too short a period of time.

The 100% mortgage has been around since the 1980's - yet you would think this is a very recent mortgage type from the current hysteria.It is also curious that some of the lending practices the FSA are loooking to stop such as fast track were introduced around the same time as the FSA took the reigns...was this a reaction to the extra costs of regulation?

I would be most interested to have seen a comparison of consumer benefits before and after regulation - in my opinion the results would probably show after the colossal sums spent and the extra costs to the consumers in terms of fees and charges there hasn't really been a huge amount of benefit.The latest attempt which is to try and control the housing market by constraining the supply of credit is a very risky venture,and could come at a huge cost.The FSA reckons if will only affect a small % of borrowers which I find hard to believe.

gingeralan

mic200202 wrote: »

Just my tuppence worth on the FSA proposals (let's remember they are just proposals).While much of the recent paper seems to make sense there are many weakness's in the data and the interpretation the FSA has put on things.The basic thrust of most of the data is that consumers overstretched themselves (mainly in the years around 2007) and that some mortgages were unaffordable.

The weakness in the report overall is that the FSA have almost completely ignored the impact of recession on affordability.They argue this away by stating that most unemployment has occurred in the younger age groups who don't have mortgage exposure.Quite incredible but true.They have also chosen to ignore the impacts of dramatic increases in the costs of heating,petrol,food and a number of other areas.Instead they focus solely on the mortgage itself as being unaffordable at outset.

The FSA by its own admission does not have a lot of data prior to 2004 when they started regulating mortgages.Most of the detail is therefore naturally concentrated on very recent data.While they do show arrears levels in certain types of mortgage the lack of historical context (ie over the entire mortgage book held at a particular time) means they could be analysing too small a sample over too short a period of time.

The 100% mortgage has been around since the 1980's - yet you would think this is a very recent mortgage type from the current hysteria.It is also curious that some of the lending practices the FSA are loooking to stop such as fast track were introduced around the same time as the FSA took the reigns...was this a reaction to the extra costs of regulation?

I would be most interested to have seen a comparison of consumer benefits before and after regulation - in my opinion the results would probably show after the colossal sums spent and the extra costs to the consumers in terms of fees and charges there hasn't really been a huge amount of benefit.The latest attempt which is to try and control the housing market by constraining the supply of credit is a very risky venture,and could come at a huge cost.The FSA reckons if will only affect a small % of borrowers which I find hard to believe.

Some good points raised. I didn't realise 100% had been around that long, but, correct me if I'm wrong wasn't there another house price crash in the early ninties? perhaps due to excessive lending?

Just from a professional point of view, we have kinda gone well off the original topic of removing i/o mortgages, do you think it is sensible to borrow short-term to lend long term? Surely people who run these organisations can understand that if they would be unable to roll this credit over there would be a huge liquidity crisis in their organisation.

Also jamesd, just because it might look like a good idea to go down the local casino and put your life savings on 36 red would you? this is what Northern Rock et al. did with our money, I thought that if the government had bought at the bottom of the market how come we have lost many hundreds of millions in the sale of whats left of Northern Rock to Virgin? I am sure we will repeat this resounding success with both RBS and Lloyds, and allow some ery rich people to become even richer at the expense of the state.

Thrugelmir

gingeralan wrote: »

Some good points raised. I didn't realise 100% had been around that long, but, correct me if I'm wrong wasn't there another house price crash in the early ninties? perhaps due to excessive lending?

Though on far lower income multiples. With my first mortgage an endowment policy had to be assigned to the lender. So the lender was aware if premiums were not paid etc.

gingeralan

Thrugelmir wrote: »

Though on far lower income multiples. With my first mortgage an endowment policy had to be assigned to the lender. So the lender was aware if premiums were not paid etc.

So they used to monitor the performance of the repayment vehicle and they still went belly up. Excellent, so much for the new FSA proposal, let's do it again, just with even more money this time.