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Too close to home

Robert Peston | 18:33 UK time, Monday, 10 September 2007

The collapse of a small mortgage lender, Victoria Mortgages, may seem neither here nor there in the scale of things.

The City watchdog, the Financial Services Authority, has tried to play down the significance of Victoria’s passing.

And in one sense, the FSA’s relaxed demeanour is reasonable.

Victoria was simply a vehicle for collecting mortgages from British housebuyers with less than perfect credit histories and then turning them into bonds for consumption by investors.

Last year it sold around £500m of mortgages. Even so, the only people who should be seriously inconvenienced or damaged by its demise are the 381 customers with current mortgage offers from Victoria that are yet to receive their money.

But what did for Victoria is a trend of wider significance – investors’ loss of appetite for this species of debt and the refusal of an unnamed bank to underwrite Victoria’s loan book pending any re-awakening of investors’ hunger.

Victoria is a microcosm of the wider credit squeeze, viz the reluctance of banks to lend to other financial institutions and the evaporation of demand for certain kinds of bonds and tradeable debt.

Here’s why Victoria’s demise matters: it operates in markets that directly affect you and me, in contrast to the special investment vehicles and hedge funds which have been the main British victims of the turmoil so far.

The Bank of England and the Financial Services Authority will be hoping that what has happened to Victoria is not the start of a trend. To state the obvious, they would be less relaxed if a larger household name mortgage bank were to have difficulty raising finance from banks or the money markets.

Comments   Post your comment

  • 1.
  • At 08:11 PM on 10 Sep 2007,
  • Iain wrote:

This demise highlights the cost to the wider economy of the current credit market constipation.

Some commentators see the crisis as a comeuppance for the flash boys in The City. However for real people with poor credit, this news means that there is less opportunity for them to borrow to buy their houses, if that's what they wany to do. If they are able to borrow, then they will pay more than they otherwise would have done, beacuse there will be less competition.

People with better credit will also end up paying more for mortgages, car loans, credit cards etc. because the interest cost embedded in these products will rise a bit, for the same reason.

  • 2.
  • At 08:29 PM on 10 Sep 2007,
  • Ian N wrote:

This may well be the 'thin end of the wedge', but as the market is now being governed by Libor rates and not Bank of England Base Rates, the intervention of the MPC in reducing interest rates would be of little significance at this time. It is a known fact that Financial Markets of any kind only thrive on confidence, so when the Banks will not lend to each other it is only a matter of time before some other Institution falls the same way as Victoria Mortgages.

I do not wish to be a messanger of doom, but there needs to be a correction in the housing market, so as to bring the costs down to a level where incomes are sufficient to cover the cost of the borrowing. When the income multiplier is lower, then we will be able to see the true value of property, remebering that a house is the only investment that you can live in. Any correction could be destroyed by the 'Buy to Let' Brigade, who have forced up the price of affordable housing beyond the reach of First Time Buyers, who have historically been the seed corn for the housing market.

  • 3.
  • At 09:10 PM on 10 Sep 2007,
  • F.F. Mitchell wrote:

The British housing market is in such a massive bubble situation that the sooner it bursts the better, before we are all dragged down by it. Values are so way out of line with reality it is unbelievable, yet all the organisations involved in housing deny it, (do they also say "cross my heart and hope to die" when making the denial ?).

My friends recently sold a very small terrace in England, and were able to buy a large detached house with 3 large bedrooms, fullly equiped kitchen etc, and a 3-car garage in Tallahasse, Florida, and still have cash left over !! Yet the US house was regarded as 'a bit expensive' by the locals.

Never mind 'thin end of the wedge' - this is the sharp end of the pin, now watch the housing bubble go POP!

Unfortunately a lot of innocent working families who got suckered into believing that credit will always be cheap and property prices will always rise are going to bear the brunt of the hard times to come. Still, not to worry, as long as those nice gentlemen in The City still get their fat bonuses at the end of the year...

  • 5.
  • At 10:16 PM on 10 Sep 2007,
  • Mike wrote:

Oh my goodness. Wait until 2008. By then the credit "losses" will largely be better known to everyone. If banks' liquidity is that bad, then UK Plc is in real trouble.

Higher costing and less available loans for individuals and business spells recession for the UK.

Methinks a snap election might be coming before Santa fills the Xmas sacks!

  • 6.
  • At 09:22 AM on 11 Sep 2007,
  • Richard wrote:

Have recent governments created a Frankenstein's Monster? The Thatcherite philosophy of home ownership followed by a long era of cheap and easy credit has shifted inflation to housing. Consumer spending has been maitained by this "increased" asset wealth and cheap credit.
The government will not want the housing bubble to pop because of the recession it will bring and the loss of votes. So will do all it can to keep the bubble rolling, perhaps by keeping the cost of borrowing as low as it can.
When we are in the unusual situation where the government and public want a bubble to continue then it can get much further divorced from reality before it collapses- wasn't this the problem with the South Sea bubble which we now look back on as unbelievable madness.

  • 7.
  • At 10:00 AM on 11 Sep 2007,
  • newspaceman wrote:

If lenders revert back to 3 x income, or even 2.75, then this will prevent most first time buyers from getting on the housing ladder, or should I say snake.

Additionally, any current borrowers who have obtained more favourable lending criteria in order to purchase, will find that they cannot even borrow as much as they owe now, based on the "new lending" policies.

This happened last time, it was the lenders who pulled the plug on the borrowing facilties and as such, no one could borrow as they had previously. No one.

If we look at the UK market then how many current outstanding mortgages have been obtained through extraordinary lending criteria, ie 110% loans, 5 x income, self certification. Are these not realistically sub prime, in terms of risk to lender if not name.

cheers

  • 8.
  • At 10:01 AM on 11 Sep 2007,
  • Tom wrote:

Lots of other lenders are due to the market in the next few weeks to try and sell their next batch of mortgage loans. Chief among them will be Northern Rock, which relies on the secondary market for 75% of its funding. If it can't sell the bonds, or any others experience difficulty, expect mortgage rates to rise VERY rapidly across the board.

  • 9.
  • At 10:15 AM on 11 Sep 2007,
  • Peter wrote:

If anything, the reduction of money available to first time buyers will worsen affordability by pushing the remaining stock long term into the hands of those who have the means to buy and who won't ever sell.

If you are a long term BTL investor like me, (and I make no appology as Gordon Brown destroyed my pension forcing me to seek alternatives), the value of houses is of no concern. The fact remains if you put £100,000 into a pension, you would not gain an inflation proofed income of £500 a month for life as you would when the house is paid for.

If you invest for income, the fact the property halves in price is of no concern, you still have the income to pay for the mortgage if you are sensible and have low LTV values as I do and you have planned ahead and have a 10 year fixed rate portfolio mortgage which means borrowing costs are fixed anyway, meaning LIBOR and BOE rates are of no concern either providing you structure the debt to deminish within the 10 year period.

The houses I have bought will never be sold because they are worth more in income than the selling price.

I see this current uncertain markets as an amazing buying opportunity. I beleive we are seeing a complete change in the way the UK housing market works.

Prices could drop 50% and still most people could not afford to buy on an average income so, like Germany, the people who have the means then basically buy up the housing and let it out.

The ONLY solution to this is to attend to the issue of supply and demand - demand is driven by the growth in population which must stop. There is no more room to build more and more houses and this is a small island.

Private landlords are forfilling a need that used to be addressed by council housing.

Before the inevitable hate mail, I should point out that I have a job that pays £13,000 a year and I am disabled and saw this coming 6 years ago and invested at the right time. I saw BTL as a way of circumventing the descrimination disabled people have in the world of work and business.

I also saw the coming LIBOR crisis and fixed the rates. Anyone with any financial ability could have predicted all of this.

With 600,000 new homes required each year just to keep up with demand, let alone the upward pressure on housing costs and increasing build costs related to material prices booming, there is no hope of a housing crash. If it did crash, I and most other investors would be very happy as the short term dip would make a fantastic time to purchase.

The reason we encourage immigration, which has many positive aspects, is mostly to gain more people to prop up the pyramid scheme that is the pensions system, so that is unlikely to stop anytime soon either.

The other thing to bear in mind is that asset prices just refect the TRUE inflation seen in the money supply as the BOE pumps ever more cash into the system, printing more and more money, (13% this year so far I think). The BOE have devalued the pound by this 13% year on year for a decade.

Without the insane fiat currency and fractional reserve banking, these prices would never have been seen.

Not what many want to hear but it is the truth.

  • 10.
  • At 11:34 AM on 11 Sep 2007,
  • symo wrote:

An excellent article. Whilst I agree that the impending crisis has started to affect the Hedge funds first it is naive to assume that these losses do not affect the man in the street, as many pensions invest in the hedges.

Victoria's demise was inevitable as it was as newspaceman wrote giving sub prime mortgages by another name. The BBC would be reminded that honest and fair reporting means that it has a duty to report these sub prime loans as just that.

As a side issue to this the British consumer's taste for credit has shown no signs of abating with BTL mortgages up and average house prices reflecting this. The Bank of England has no reason not to raise interest rates further after the recent positive news on economic growth.

  • 11.
  • At 01:19 PM on 11 Sep 2007,
  • Christopher Cook wrote:

Peter (post 9)

There are many holes in your arguments that the Buy-to-let brigade will be "all right jack" in the coming financial "armagedden"

To pick a couple. If houses drop 50% (your figure, which I happen to agree is very likely now over the next 5 to 10 years), then unless you have a LTV of 50% or less, then the value of your properties will fall below the value of your outstanding Mortgage debt. When that happens, you had better keep a close eye on your bank manager...he may well get twitchy with the situation and forclose the loan (its business after all and not someone's home!). Also With much tighter lending criteria you may find it harder to "load up" on "cheap" property.

As for the fallacy of Housing Shortage. Firstly Populations across northern regions is FALLING, every western nation has been experiencing a Boom in house prices, even those with lots of land (look at the US). There is some basis for price rises in the South East corner due to shortages, and maybe the Retirement havens of the South West, but not to the extent we are seeing.

When the financial disaster really gets going and people lose their jobs in droves, the rental market will lose out. Children will remain at home longer or return home because they won't be able to afford the rents either, so you may find yourself in difficulty trying to find a tenant to pay your "Guaranteed £500 a month for life".

I feel sorry for you, you have been sold a lie, and will suffer once again, with less chances than most of being able to put it all right.

We are all going to suffer...even us wanna-be First Time Buyers...we may also lose our jobs, we will also see rises in rents and the extra worries as banks reposses our landlords properties from under us!

This is not going to pretty.

  • 12.
  • At 02:21 PM on 11 Sep 2007,
  • Jacques Cartier wrote:

Through the summer, there have been basically two positions on this sub-prime malarkey. On the one hand, there’s been lots of hand wringing about how banks shouldn’t lend to people who can’t pay it back (despite the fact that banks pulled down zillions in profits over many years by doing exactly what they have been doing). Yet on the other hand, now there is hand wringing that banks _don’t_ lend to people who can’t pay it back - they just can’t win, those poor banks can’t!

So which way round is it … should banks continue to lend willy nilly to every Tom, Dick or Harry that comes through the door, or scale back on it? And if scaling back is the right thing to do, why are people still grumbling? There is a lot being said about "huge losses" for banks, yet little is said about the billions of profits these business have pulled down in recent years. All this sounds like an irrational desire to "have your cake and eat it too".

  • 13.
  • At 04:25 PM on 11 Sep 2007,
  • Peter wrote:

Re: Christopher Cook's comments.

I agree with you in many respects and you make some very good points, but my LTV's vary from 35% to 55% over my portfolio and I have a pre agreeded line of credit at a fixed rate to purchase more property.

I would agree that there will be problems where silly LTV's given to marginal landlords who have negative rates of return, (i.e, the rents do not cover the loan interest, which is quite common), who don't have cash reserves and an unrealistic view of occupancy rates, rental and capital growth will come unstuck.

Banks are very unlikley to forclose on those who are in that position as they will loose money which will be made up in years to come unless the borrowers are in hopeless default.

There is evidence that default rates of landlords are in fact the lowest, LTV's tend to be more sensible.

I was told by the underwriters that my portfolio mortgage was just the sort of business they were looking for in preference to first time buyers and they may well favour commercial loans with low LTV's

Experienced landlords with accounts and track records seem to be favoured over ordinary home owners at present. This trend will probably continue.

For sure, people wanting to start now will find it almost impossible to secure high LTV loans and will have loaded interest rates, but then given the risks, why would you wish to start to invest in property at the height of the peak anyway?

I'm prepared to take losses as I invest for income now, not capital growth but I can only afford to do this due to the increases I have from the run up of prices. It is, like any investing, all about timing. It would not be wise to take that attitude on an 85% LTV....

I changed tack as soon as I had cash reserves in that I only buy at auction now, mostly repos, in very poor condition, then rebuild them to a very high standard before letting them out.

This means that I have bought at 30 to 40% below market valuation in any case so I have a good cushion in LTV as well as having the best quality properties to let out, also nice for the tenants to have as new houses. They let before they are even finished in most cases at present.

A further point is that a study of historic house price crashes reveals that prices pick up within 5 years or less.

The reason property, (and indeed all asset classes, from Monets to fine wines), have been bid up is the huge wash of liquidity stupidly created out of thin air by the banks, the lack of supply is only one prop in the supports for housing. That and the poor rates of returns on investing cash in a bank or bonds. Assests can be a good hedge against inflation.

Cash is the worst investment in times of high inflation, (lets face facts - inflation is really running at some 10% pa for the things we can not avoid paying for). So if you were rich and had 100k lying in the bank, you would go out and buy assets with the cash rather than watch it devalue.

I don't really have an I'm all right mentality as such, but just as the Sarah Beany's of the world loved to talk up property in the height of the boom, doom mongers love to talk it down now when things are looking bad.

The truth is somewhere inbetween.

If there is a severe credit crunch, it will lead to more renters. A boom leads to inflated/increase asset prices. I think that is the unique appeal of property.

The lower prices, (if/when they happen), won't help affordability if FTB's are expected to pay 10% interest due to bank's reluctance to lend to people with no track record of payment. (A conservative estimate I think of the interest rate peak, based on LIBOR rates rather than BOE rates, which are not controling the price of credit for at least the next 18 months).

Every investment carries risks, there is no such thing as a risk free investment.

As long as you have a cash cushion of 2 years payments in the bank and a realistic view of the cyclic boom and bust of housing, I think there is less risk than a share overall as property is at least a tangible asset in demand regardless of the state of the economy.

  • 14.
  • At 07:57 PM on 11 Sep 2007,
  • Paul wrote:

Two comments: one is that what we have seen over the last few months, and the various scenarios for the future, show that the central banks have been wrong to ignore asset price inflation (particularly house prices) in the measures that they use to set monetary policy in recent years.

The second is that if the balance of ownership tilts away from owner-occupiers to landlords, there will doubtless be political pressure to change the tax structure, which is currently very favourable for the latter. Removing mortgage interest relief, and/or adjusting direct property taxes, might even help redirect capital towards more productive uses and end the myth that landlords are entrepreneurs.

  • 15.
  • At 10:19 PM on 11 Sep 2007,
  • Niels wrote:

I visited Victoria Mortgages' website this morning (9/11) and had a chance to browse its content (you might still see some of it cached on Google) before the site closed. What struck me most was the manner in which it used loaded language like self-cert, heavy adverse etc, in such easy-going and innocuous ways. It served to remind me that the business jargon of the day is always a good indicator of the cynicism of the age.

  • 16.
  • At 10:30 AM on 12 Sep 2007,
  • Colin Smith wrote:

No idea why you're all speculating. The governments and central banks have already shown what they're going to do. (they're bankers after all)

They are going to inflate, just as they did the other week. They will print/borrow (call it what you will) enough currency to save the system. Essentially this means more boom, accelerating inflation and another "crisis" in a few years as the debt eats up the cash. There may be a couple of minor casualties like the one mentioned, but "the system" will be saved.

Blaming the banks for causing a credit crisis is a waste of time. It's the way the monetary system has been engineered (by the banks). The nature of the "crisis" is completely natural, crash now a little or crash later, but larger. It's the politicians who decide when the crash occurs. Gordon won't want it to happen on the run up to an election. He'll want us fat and happy till then. The independence of the BOE? You're kidding, right?

Who benefits most? Well those with assets outwith cash. That'd be the wealthy. Interesting result for a supposedly Labour politician.

There are some people we should think about, just a little. When you do inflate, the people most affected are those who can least afford it. You're devaluing the currency. You are literally transferring wealth away from anyone with cash in the bank; pensioners savings, the poor on low or minimum wage. Anyone who's salary increase doesn't keep up with inflation, and that's most of the working population, public or private.

Peter above seems to be one of the few who understands what's really going on.

  • 17.
  • At 11:15 AM on 12 Sep 2007,
  • Jacques Cartier wrote:

Comment 14:

> " the central banks have been wrong
> to ignore asset price inflation
> (particularly house prices) in the
> measures that they use to set
> monetary policy in recent years"

I was surprised when I discovered that house
prices are left out for these purposes, as if prices weren’t
really going up and affecting everything.

We say Ostridges are daft for putting their heads in the sand,
so why does the MPC indulge in the same behaviour?

  • 18.
  • At 11:37 AM on 12 Sep 2007,
  • Peter wrote:

Pauls comments above.

I think you are absolutely right and that there will be a call for a change in the tax structure and that will no doubt be in the form of the reduction in claiming mortgage interest. But at what cost to tenants?

The problem with that idea is many people who can not buy, (for what ever reason - income, credit rating, deposit etc), would then be forced out their homes if that leads to the sale of the house or the bank taking back the house due to default.

Remember many vunerable people are housed in this way. Where do they go?

Council houses? None left. 3 year waiting lists.

Buy a house? Even with a 50% drop in the average house price, a £100,000 mortgage requires a minimum income of 30k if you are alone, a deposit of 5 to 15k, (5 - 15% LTV which will become the norm) and with lending criteria tightening, LIBOR up and controlling the morgage markets, worsening affordability would result with the higer interest rates needed to bring about this sort of drop required to halve prices. Work out the cost of even a 100k mortgage at a rate of 10%.

This may result in a lower amount of rental properties driving up rents for those who have to, often the most vunerable people.

Is that fair to them?

Further, the remaining landlords would be forced to pass on these costs, again driving up rents, (and in turn inflation in basic costs for 20% of the population least able to afford it...).

What political cost would that have?

The other nail in the coffin for this senario is the capital gains tax payable on highly leveraged properties will be more than the remaining equity. If you have 20k of equity and a 50k CGT bill, you can't sell anyway.

The fact remains, you can't legislate your way out of the mess. Either we have a free market or we don't.

The solution would be population freeze and a reduction in money supply, but neither of those will happen for political and financial reasons.

The immigration props up the pensions system, we can not opt out of that without upsetting or leaving the EU, (that is unlikely to happen, though maybe it should).

With an economy based on the purchase of goods and services, rather than a real world one of manufacturing high value items, reducing consumer spending levels to zero by imposing high interest rates and narrowing the money supply may be the best thing that could be done, but it won't happen as it would ensure the government of the day would be out of power for decades. Just look at the Tory party...

  • 19.
  • At 10:43 AM on 18 Sep 2007,
  • anon wrote:

believe me, the FSA does understand the products and risks in the companies that they regulate. the FSA has sharp minds and sharp teeth. compared to other countries (USA for one) the FSA is model of regulatory control.

  • 20.
  • At 10:53 AM on 18 Sep 2007,
  • Rob wrote:

Splendid. We will all pay for the now spent bonuses of Applegarth and co with higher inflation and interest rates for the next decade.

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