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B&B: end of an era

Robert Peston | 10:20 UK time, Sunday, 28 September 2008

The reverberations from the nationalisation of Bradford & Bingley (see my note of last night for more on this) will be profound.

First, it takes out of the market the leading provider of buy-to-let and self-cert mortgages.

Once the £41bn of B&B's mortgages is publicly owned, it will be run down over the coming years.

And it's very unlikely that the government will feel it wants to use taxpayers money to provide new buy-to-let and self-cert mortgages.

In other words, two big chunks of the mortgage market will be all-but closed - since few other banks are remotely interested in providing this kind of mortgage, which are perceived as higher risk.

That will add to the downward pressure on house prices - and may be a source of anxiety to buy-to-let investors who may have difficulty refinancing their mortgages as and when they need to do so.

Second, the nationalisation will be seen as proof that the demutualisation of building societies - which began when Abbey National became a bank in 1989 - has been a colossal failure for both the former building societies and the British economy.

These specialist mortgage lenders were under such pressure to grow their profits, as public companies, that they became reckless adventurers in wholesale funding markets.

They raised too much money too cheaply on the global money markets, which they then lent too cheaply to British homebuyers.

Which then stoked up the housing bubble. And the popping of that bubble has done for them.

Every single demutualised building society has either collapsed and had to be rescued or has been swallowed up by a bigger bank.

Just this year we've seen the Rock taken into public ownership and HBOS, owner of the Halifax, bought by Lloyds TSB in a rescue takeover.

Abbey itself was taken over in 2004 by Santander of Spain largely because it was hobbled by unfortunate forays into clever-clever financial trading.

The conversion of building societies into banks is an instance where deregulation and the liberalisation of an industry appears to have been an unmitigated disaster.

The Nationwide, which refused to follow the trend, looks smart.

Finally, there is just a chance that the nationalisation of B&B will be the last serious crisis for a UK banking institution.

Why?

Well the debacles at Northern Rock, HBOS and B&B all stemmed from their excessive dependence on the UK housing market and on sources of wholesale funding that were vulnerable to disappearing.

Our remaining big banks have much more diverse businesses, so even though they will suffer as the housing market falls, they can generate profits elsewhere to compensate.

Also they have more diverse sources of funding, they are less dependent on the whims of money managers who can shift billions of dollars at the click of a mouse.

In that sense, the nationalisation of B&B and of the Rock are the British equivalent of America's $700bn banking bailout plan.

Their nationalisation - and the rescue takeover of HBOS - removes from the UK commercial banking sector its biggest source of vulnerability.

That vulnerability was the Rock's, B&B's and HBOS's excessive exposure to mortgages that are expected to be a big source of future losses.

Comments

Page 1 of 3

  • Comment number 1.

    Robert, you think it might be the end but watch this space. There's more pain on the horizon and I think you know it

  • Comment number 2.

    I don't understand why a reasonably accurate price can't be put on the mortgage book. It's just a bunch of loans, each with a term and an interest rate, secured on a piece of property. You just need to make some realistic assumptions on default rates and property prices, and then PV the future cash flows at an appropriate discount rate ... this latter to depend on the expected outlook for interest rates.

    Given the data, and a couple of days to work on it, I could value the portfolio quite easily ... I could get it to a confidence level of inside 20%, no problem at all. So, why no private sector buyer? ... doesn't make sense to me.

  • Comment number 3.

    Robert, I have been following your blogs over the past couple of months and explain a complicated situation in its fundamental parts so that the rest of us not involved in the financial industry actually have a chance of understanding it!


    I found the debate you were involed in the other day very informative too.

    Fantastic blogging, and keep up the good work. Without you I would not have a clue why this crisis is happening.

  • Comment number 4.

    When Equitable Life had capital reserving problems, the first step was to make it closed book - basically administer existing business and not sell any new business as it would require an injection of new capital.

    Fast forward to today, NR has been merrily selling new mortgages for a year now, and equally happy to accept billions of capital injections from the B of E on a regular basis! This does not make much sense to me. Why was NR not made closed book?

    If God forbid another British financial services company requires a large capital injection there will come a time when the B of E will not be able to oblige (shame the gold reserve has already been sold off).

    I hope I am wrong but I have the feeling that sales of self cert mortgages is more widespread than is currently perceived.

  • Comment number 5.

    British banks are not out of the woods just yet.

    LLoyds may yet have problems digesting HBOS. Lloyds and all the other big banks may yet need to return for further funding, even including RBS despite the biggest UK rights issue already.

  • Comment number 6.

    Also Robert, if we do see an end to every Joe and Jane bloggs thinking there's phenomenal amounts of money to be made in buy-to-let, then good thing. Buy-to-let has distorted the UK housing market for quite some time, if many of those that own these properties on a buy-to-let mortgage have to sell them then good.

  • Comment number 7.

    The regulator too deserves a caning for this. Time after time programmes showed the self cert market was wide open to and being roundly abused. The punnishment of the odd broker over the years did nothing to stop this is no mitigant for the FSA. This crassly monitored lending happily contributed to the boom by leanding money to people who would be ok in good times but would have no hope when a downward cycle occured and rates rose or prices fell. Perhaps the Fast aSleep Authority will remember for the future that lending huge multiples to epople is, and will always be, a DUMB idea and ignoring a process being roundly abused is also a DUMB idea.

  • Comment number 8.

    "source of anxiety to buy-to-let investors who may have difficulty refinancing their mortgages as and when they need to do so.."

    Oh, and I am sure that many of their tenants' hearts will be bleeding for them at this news !

    In fact many will be wondering whether, with the downturn in the property market, and the increasing rents, whether to stop paying the rent altogether, and when the 'owner' gets stroppy, offer to buy the house at a knock-down price..

    I wouldn't condone such behaviour, but hey, as a famous leader once said 'You cannot buck the market..'

  • Comment number 9.

    If there is a silver lining to all this madness, I for one hope that those who are first time buyers will finally be able to buy a house to live in and not for investment purposes.

    As a society we brought this on ourselves...we became too greedy with visions of ever increasing house prices.

    Thankfully, a market correction is needed no matter how painful it is. Its going to be a long, cold and dark winter.

  • Comment number 10.

    #2

    Interesting if you take the presumption that what is on the books is real and solid.

    What happens if some of those trades are not real but made up ?
    What happens if the valuation is not real ?
    What happens if the income statement of the buyer is not real ?
    What happens if no one wants to buy property ?

    Throw away all your assumptions and then you will realise where we are.

  • Comment number 11.

    I was never a fan of demutualisation and am happy to be with the Nationwide.

    To all those ex-carpet baggers out there, I hope you are truly ashamed.

    Many of our building societies are/were very old, with proud histories. I could never understand how the current members could claim all of the value of a Building Society which had been built up over decades. Morally it was wrong.

    Put your savings into a building society and feel good about it.

  • Comment number 12.

    Nationalisation is unneccesary in this case. Nothing is at stake for the UK banking market as a whole.

    Labour has just got a nice taste of the 1970's again.

    The taxpayer is going to be at huge risk for most of this money.

    As for no other lenders in the buy-to-let market; what about GE Home Lending?

    Finally, i do belive that other banks are exposed; not by the mortgage market but by the CDS and derivative issues. HSBC has $50 billion of toxic debt on its books for example.

    We had better hope US taxpayers are willing to buy it all.

  • Comment number 13.

    So does this mean Northern Rock is no loner the worst run bank in England, then?

  • Comment number 14.

    Mr Peston,
    There was a group of guys in the late nineties and early 2000's who together opened deposit accounts in all the major mutual building societies in the UK and then after their membership had passed the statutory time limit to allow them to propose a resolution, forced the management of these societies to ballot members to change the societies' status from a mutual basis owned by its members to that of a limited company with share capital usually quoted on the stock exchange.
    The carrot to entice members to vote for the change was a free issue of shares depending on the value of qualifying deposits held by these members. Members could either keep the shares or sell them for cash.
    Where is the "group of guys" now ? Did they keep their shares or did they sell them for profit ?
    Am I correct in assuming that if the building societies had kept their mutual status they would have/would be surviving the banking meltdown ?
    When we had a housing value crisis in the past these societies survived even although the value of their securities in the form of the value of homes mortgaged, fell.
    The "group of guys" have a lot to answer for by exposing the old mutual building societies to the dangers of the stock markets, but no doubt they don't care as at the time they made a killing on the originalchangeovers and resulting takeovers by the big banks.

  • Comment number 15.

    Robert's point about the huge failure that has been demutualisation of building societies needs to be made more forcefully. We need strong mutual financial services companies in the UK based around responsible saving and lending, where the management do not get huge bonuses for simply issuing more mortgages. However although Labour must take some blame from this the real fault lies squarely with the Conservative mantra of private sector as all. We are now paying the price for the seeds of this naive, corrupt and grossly over simplified theory which has been thrust upon us. And that excludes the 50bn of PFI debt which has to be paid thanks to New Labour.

  • Comment number 16.

    .....and another thing......

    Why should this bail-out be the end of the problems for the British banking sector ?

    Robert's rather bold statement seems to me to be based on the assumption that it's just home-grown debt that caused the issue.

    Isn't the real problem that much of America's dodgy loans have been sold on throughout the world's banks. Presumably Paulson's rescue plan would only cover debt still owned by American institutions, so any of this debt owned by British banks is still going to cause a problem ?

    More "sudden" bail-outs required ?

    DEFINATELY !

  • Comment number 17.

    The problem was built into the birth of BB and the other building societies as banks. The minute they were turned into banks they were at the mercy of shareholders who demanded profit growth. The only way profit could come was by expanding the operation. With the traditional banks already holding the routine high street banking there was nowhere to go other than progressively towards loans to unsound borrowers. The more profit made the more profit demanded. It is suggested the management was not up to the job, I don't think the boards had any choice, in the same way BB had no choice in becoming a bank, the shareholders voted for it.

    Lady Macbeth.. Tis best the deed is done quickly.

    Another problem for Emperor Nero, sorry Gordon Brown, I'm sure he couldnt have seen it coming whilst he was off telling the world what to do. Now what was that about a gold clad staute upsetting the citizens. Mutterings of scorched earth.

  • Comment number 18.

    If that is the last bank that I have to buy with my taxes, then good, but I somehow doubt it.

  • Comment number 19.

    It's not the end of financial institutions going over the next 18 months, it just won't be on the same scale. There are likely to be even more consolidations amongst building societies and things will only return to some sort of normality in atleast 2 years time. And I for one am glad that buy to let investors stand to lose out because it was that type of purchase that has made it difficult to be a first time buyer.

  • Comment number 20.

    Jack @ 10

    Fair point. Bet there's plenty of fraud in there, as you say. But, still, you can make an allowance for that in the valuation. The private sector is meant to be good at this sort of thing, risk versus reward and all that ... I'm extremely disappointed in them, to be honest.

  • Comment number 21.

    NOTE TO ALL BB SHAREHOLDERS

    If you are unsure of what this mean of where to receive advise visit the UK shareholders associations website.

  • Comment number 22.

    The last serious crisis for a UK banking institution? We'll see!

    Surely to support this contention you need to explain what happened to the Cheshire and Derbyshire Building societies, and then explain why whatever happened to them won't happen to other small building societies.

    Can LloydsTSB cope with HBOS? Who knows? They probably don't know either as 5 minutes due diligence is unlikely to reveal anything much, and whatever assumptions they have made must involve some kind of assessment of UK house price levels. I'd be surprised if those assumptions turn out to be realistic.

    Anyway I thought we were supposed to be in a global system of finance. If this is the case then surely events elsewhere can impact on the UK.

    Check out Fortis Bank (I'm sure you already have).



  • Comment number 23.

    I am wondering, has the (financial) world gone crazy over the last few weeks - or did the world go crazy years ago when demutualisation was king (and not just for building societies) and building societies (and solicitors) were buying up estate agencies like mad?

    Are we now seeing some of those chickens come home to roost?

  • Comment number 24.

    A big thankyou to Robert Peston for presenting this commentry in a manner and form that I can easily understand .
    .
    Same goes for your presentations on BBC news .

    Well done indeed !!!!!!

  • Comment number 25.

    @2, sagamix

    Say someone lends 50 billion from the money markets, in order to lend that to people wanting a mortgage in expectations of a 100% return and a repayment premium of 50% of the original amount.

    Now people stop re-paying their mortgages, and any properties are hard to sell (doubly so in the buy-to-let market, as many invested in apartments which are currently difficult to sell) and the ones that do are at less than the mortgage value.

    You're left with a bank owing 75 billion and no reasonable expectation of getting the original 50 billion originally lent out, let alone the extra 25 billion required to cover their own repayment premium.

    Even the repossessed properties won't cover the costs - if they won't sell, they're not worth anything to the bank holding the keys.

    No private company is going to take that kind of exposure on. They'll wait for the bank to fail, or be nationalized, and then swoop for the profitable parts.

  • Comment number 26.

    Excuse my ignorance, but if we're nationalising banks, can't we go some way and solve the the Housing problem in the UK at the same time?

    A lot of these Mortgages are for BTL, so turn them into Social Housing when the Defaulters can't make the payments.

  • Comment number 27.

    The end of AAA Ne[a]ro ,banks fiddling while rome housing market burns

    And as in the ancient Roman times gangs of fireLighters[the original short sellers]posing as fire fighters rome the streets ,offering to put out fires if the owners sold their burning houses at a fraction of their pre fire worth on the spot [market]


    History repeated in cyber reality

  • Comment number 28.

    So, how many unit trusts and investment trusts have bought toxic debt as an investment ?

    How many more innocent, maybe naive, Shareholders and pensioners have to suffer in this crisis?

  • Comment number 29.

    As for it being the 'last banking crisis' - that's a laugh.

    There will always be new ways and means to make money in banking, and some of those methods will expose banks again in the future.

    Regulation and taxation has bred a belief in short-termism - grab the cash before the Chancellor does.

    Long-term investments, by businesses such as banking, won't be in vogue without government assurances those investments won't be raided to increase tax receipts. As such we can look forward to cycles of banks raking in massive profits, then falling into crises, for a long time to come.

  • Comment number 30.

    How many Hedgefunds have complicated finances they will not be able to re finance?

  • Comment number 31.

    So what's happened to all the Freemarketeers of not so long ago?
    When the banks were raking in all those fees from those going overdrawn by a few quid and throwing money at anyone who could fill a form in, "the market" apparently could not be interfered with and would sort itself out.Well it's certainly sorted itself out and suddenly it's apparently the role of the Government to bail these institutions out.
    However much Gordon Brown bleats about the International situation things here were obviously building up into a massive bubble that would eventually burst and he was the guy supposedly at the helm,worse he was quite happy to take the credit for the false sense of well-being the house price fueled spending binge engendered.
    Is it any wonder that people afraid of losing their homes,jobs,denied proper pay rises and worried about the cost of food and fuel,in some cases to the extent of wondering whether they'll survive a hard winter are increasingly turning their political apathy into outright hostility? There appears to be no fairness for "the ordinary person" in this country,just a contempt from those above which is rapidly becoming mutual.
    This Government has not only created financial instability but more worryingly increasingly social instability.

  • Comment number 32.

    22, well we shall see within the next 12 months, during that time Lloyds will have to see how to refinance a large part (around 150bn) of the debt that HBOS has. I for one am not sad at the loss of HBOS, although my experiences of them were neutral they were by far and away the worst bank when it comes to treating customers fairly. There bank charges (penalty) structure was one of their main profit drivers, indeed they were robbing the poor to pay the rich. The sooner this shower of losers is off the market the better - that said I do feel sorry for the ordinary staff.

    However just wait, will the FSA drop all the charges cases next year? After all it seems the banks no longer have the billions that they took from customers in the form of charges. Thus returning fees may indeed be the end of many of them.

  • Comment number 33.



    On the 25th September

    Mr Richard Pym, Chief Executive, said:
    "The changes we have announced today focus the business as a strong savings bank, reduce the size of our lending activities, and increase our capacity in arrears collection.

    We are a strongly capitalised bank now undertaking a complex transition with regrettable job losses, but we are planning to put the problems of the past behind us and have a business which is fit for purpose going forward."

    Can somebody actually explain why in three days, this situation developed ?
    As yet I have read/hear no adequate explanation.

  • Comment number 34.

    I certainly shalln't mourn the loss of the self-cert and buy-to-let mortgage markets. The former was a disaster waiting to happen. The idea that you could simply take someone's word for their level of income was absurd. As others have pointed out, there was plenty of evidence of widespread abuse and yet the Government and FSA did precious little to stamp it out.

    As for the end of buy-to-let mortgages, excellent. They've probably done more than anything else to prevent many potential first-time buyers from getting a foot on the property ladder. Buy-to-let was a market fueled by greed and recklessness. Most of the baby boomers who invested in buy-to-let would never have been able to had they been prevented from buying property when they were young.

  • Comment number 35.

    robert, what you mean is that if there is less of a market for buy to letters to remortgage or refinance then the costs to those mortgagors will shoot up due to lack of competition, which will put more of them in difficulties and might trigger a sale of more buy to lets in a distressed market.
    result: more repos.

  • Comment number 36.

    I wonder how many people will end up homeless in the next few years.

    I also wonder how many families will be repossessed when they are unable to keep up mortgage repayments ?

    Very few silver linings in these clouds.

    I'm not a fan of Europe, but with the loss of inward investment in this country, we could be looking at two pounds to a Euro.

    Maybe, we will wish we had all joined the Euro years ago !

    I can't believe I've said that !

  • Comment number 37.

    Can a Moderator tell me why sometimes when I click on Post Comment, my comments disappear and there is no evidence that my comments enter the queue. Is this a tech fault or do you blacklist some bloggers?!

  • Comment number 38.

    Well it just goes to prove it. If the best brains in the financial world come up with the same solution.

    So our balance sheet reads:

    Deficits= Capatalism

    Credits= Nationalism

    So why don't we just skip out the middle man or woman and nationalise everything.

    Then I for one could revert to a 9 to 5, five days a week job, with four weeks holiday.

    I would have a structured career ending in retirement with a reasonable pension.

    Instead I am left with a pension hole which can't be filled, no guarantee of a job, no real career prospects, just the sure fire knowledge that somebody else will be getting rich at my expense. We have been living boom and bust for most of my career and just when I think I am on the right track something like this happens.

    So the truth of the matter is the little people are picking up the pieces again and will invariably be the one's that get 'shafted' in the process.


  • Comment number 39.

    I have been telling anyone who would listen for the last two years that Bradford and Bingley were going to be the first against the wall when the revolution came.

    OK, I was wrong - Northern Rock were the first - but BnB's reckless behaviour promulgating self-certify and buy-to-let mortgages to the exclusion of all else has been an obvious disaster waiting to happen.


    If it's been obvious to us, how was it not obvious to the regulators? Or to their shareholders for that matter? BnB's entire strategy was hinged on the housing bubble never ending.


    Anyway, I have absolutely no sympathy with BnB or its shareholders - they have not been victims in this financial crisis, they have been part of the cause.

  • Comment number 40.

    No4

    Northern Rock was not made closed book , because it was fundamentally profitable.

    It's just that it's sources of funds dried up.

    It's basic model of lend and borrow was working just fine , until someone turned off the money markets..........

  • Comment number 41.

    In fact, what has become of the short term private equity bonds, issued to buy out businesses?

    Will they be refinanceable?

  • Comment number 42.

    CAAAndyfloss economics spun full of AAAir

    AAA's you bite into the more nothing is there

    The carrot is gone the stick is your share

    tis all that is left of our state of farewell


    NEWsSEEKERS

    the carnival is over we may never meet [our debts] again

  • Comment number 43.

    We taxpayers are now in possession of many thousands of houses, as we have taken on thier mortgages. So there should be no shortage of social housing for the foreseeable future!

    Yet another peice of Mrs T's work has failed and must be rolled back, i.e. her policy of selling council houses. We taxpayers are now buying the equivalent number back, only at vastly inflated rates!

  • Comment number 44.

    @26, Tengsted

    Problem there is twofold.

    1) The government turfing people our of their homes, even buy-to-let ones, isn't going to a vote winner.

    Back in 97 Brown stated that Labour, unlike the Tories, wouldn't allow house prices to rise unsustainably and then crash (another broken promise Gordy!) and Labour used posters highlighting repossession rates under the Tories. Brown, and Labour, know that repossessing en masse would provide the Tories an entire arsenal with which to win a general election.

    2) The properties that they possibly could get away with repossessing are the apartments.

    The ones remarkably similar to the ones we've been demolishing for the past decade. The ones that were reknowned hovels, hellholes and breeding grounds for social discord, isolation and resentment.

    I know the 70's are in vogue for Labour right now, but even they must baulk at the prospect of a return to high-rise style social housing.

  • Comment number 45.

    Thanks for spelling out something that is blazingly obvious but rarely admitted: that demutualisation of building societies was a lousy con-trick.

    It's like all the utility privatisations -- legalised looting of publicly owned assets. I voted against on principle, because it was immoral.

    But I then moved my savings and mortgage away from the TSB, Abbey and Halifax for sound financial reasons. Banks sometimes offer a cheap deal to hook you in, but it's short-term and they rely on people not realising or not bothering to move.

    If you've got to give money to shareholders, there's less for the savers, and borrowers have to pay more. It's obvious. Why do the looters always get away with it?

  • Comment number 46.

    Let's be honest, is anyone really that surprised?

    Did anyone at the time really think that demutualisation was a good idea? Apart from the financial Ringwraiths that brought it about?

    I know for a fact that there were some that could see beyond the bribes of free shares, and felt that it was not only very unwise but also morally wrong, and closed their accounts if their building society demutualised. They had no wish to be turned into cannon fodder for the money markets.

    Unfortunately, they seem to have been in the minority.

  • Comment number 47.

    PS "Privatise the profits, nationalise the losses" makes good sense to the looters of our economy, and always has done. Nice that they've always got us to bail them out!

  • Comment number 48.

    The joy of communism for the masses, has been at least in the past, that everyone is equally poor !

    Just read any factual history books !

    Of course, crime will fall, as few people will have anything worth stealing!

    Except the Commissars!

    Strange how someone will always end up a Millionaire (even under comunism).

  • Comment number 49.

    #37

    If you are using any shorthand version of 'and', don't, if you want to use a shorthand use a plus (+) sign.

  • Comment number 50.

    @37, markanash

    Check the URL at the top, you'll see something like 'dnaerror' in it and an explanation of why its been rejected.

    It's usually a character it doesn't like - like an ampersand - or a profanity block.

    The profanity block is quite comedy, it's filter is flawed. It had problems with me using the 11th letter of the alphabet as shorthand for 1000 the other day. It thinks that's swearing in some cases.

  • Comment number 51.

    Welcome comrade !

    Step this way with your Potato Ration book open !

    Alas for what was left of the British way of life.

    Still we can always watch sitcoms about it on Freeview (on our communal televisions).

  • Comment number 52.

    Roll up, roll up, buy your Potato futures here!

    Special discount to Commissar's and Party members only!

  • Comment number 53.

    Actually the humble potato does illustrate the basic equality of extreme regimes.

    Robber Barons give their peasants French Fries.

    Commissars give their peasants Boiled Potatos!

    Note the role played by the Potato, fulfilling the same social and cultural role for both sets of oppressed masses.....

    Hmm, I wonder what bath tub Vodka tastes like!

  • Comment number 54.

    > Wealthy financier 'killed by train'

    A wealthy financier said to be overwhelmed by the current global banking crisis has died after throwing himself in front of a commuter train.

    ...continues at http://www.guardian.co.uk/uk/feedarticle/7834152

    He leaves a wife and child.

  • Comment number 55.

    Time to stop this buy to let nonsense - it distorts the housing market, taking properties away from deserving families.

    Does anyone else feel the same? There is a petition on this at:

    http://petitions.number10.gov.uk/Propertymarket/

    I'm amazed there are so few signatories!!

  • Comment number 56.

    #37

    I just had this problem. If you look in the address bar you will see it says "profanity filter". It seems that bbc consider many words to be profane, even inoccous ones. At least that was my experience.

  • Comment number 57.

    #26 - rather than provide social housing in an overinflated property market, why not return these properties to the market and allow prices to come down to the normal level. If normal people can afford normal properties then the need for social housing is greatly reduced.

  • Comment number 58.

    I believe things will continue rough for a while. The proliferation of complex packaged products means that it is not just mortgage assets that are tainted.

    Scandinavia went through something not too dissimilar in the 90s, and the Governments there intervened by creating "Rubbish Banks" to absorb bad assets. The scale was a lot smaller than now. The root causes, however, were the same. Basically, unsustainable growth of loans which supported economic growth, and was therefore let to carry on unchecked. The result was a prolonged period of low/no/negative growth.

    Going forward, there needs to be real debate of how this can be prevented/mitigated in the future. BoE/FSA/HMT need to develop the skills and the guts for true risk assessment and then act on it.

  • Comment number 59.

    I am afraid Doctor Gloom's pessimistic view may be correct. We have heard only about mortgage related woes and the over-dependence of Northern Rock and HBOS on wholesale money markets. What about spiralling default rates on consumer loans and creditor cards? Once borrowers are in negative equity with their houses the barrier to bankruptcy lowers. I am seeing (as a debt adviser for well known charity) a dramatic increase in heavily indebted house owners giving up their houses and then petitioning for bankruptcy to clear mortage shortfalls and unsecured debts. The capital bases of some are high street banks look particularly vulnerable.

  • Comment number 60.

    There are some very fundamental differences between the US and UK housing markets which most commentators seem to ignore or are unaware of:

    1/ US home-owners can hand back the keys with no further penalties - banks are unable to seize other assets to make up the shortfall. This means that even rich property owners can choose to hand back the keys for individual properties that are in severe negative equity and that they cannot rent out. This is not the case in the UK where banks would be able to pursue buy-to-let investors, seize other properties including their principal residence and non-property assets. This means that buy-to-let investors will be very reluctant to allow themselves to be repossessed as they will then risk total bankruptcy.

    2/ Most US repos are happening in new-build suburbs which are in effect becoming hollowed out. With rising petrol prices qand no public transport these properties are becoming impossible to rent out and cannot be sold at any price. A similar situation does not exist in the UK.

    3/ UK repos are running at a far lower rate than in the US and when they are auctioned they are still finding ready buyers who are then able to rent them out.

    4/ The UK rental market is very healthy and if anything will become even healthier as fits-time buyers find it ever harder to enter the market with minimum deposit % rising.

    5/ There is far less new build in the UK compared to the US and there is still an overall shortage of housing with a rapidly rising population.

    6/ Self-cert mortgages may be higher risk however this can be heavily overstated - these mortgages were created for self-employed buyers who earn a large part of income without payng tax and the vast majority of them will continue to pay their mortgages every month for the reasons stated above.

  • Comment number 61.

    You should put more emphasis on the 'liberalisation' side of this deal, the takeover of the profitable parts by a foreign bank.

    It's time this word became common currency and understood by the public. The exiting of profits overseas get set into stone ie irreversible, through 'liberalisation'.

    A option would be to offer these profitable parts to UK people co-operative partners.

  • Comment number 62.

    There's been some great reporting here, Robert. Let's now focus on what happens to Private Equity - it's likely to make the mortgage fiasco look like a minnow!

  • Comment number 63.

    I bought some funds back just after the dot com boom. Paying the 5% commission on the investments and taking the sales patter that they would give me frequent updates and advice on the progress of my investments.

    As it turned out I lost over 50% in about 1 year, all the time being told don't sell it will come right in the end. At this time I got very angry and shouted "How much must I loose before you will tell me it is time to sell ?".

    The response was "We are not allowed to tell people to sell." So the reality of banks.

    They are nothing but glorified salesman.

    They don't know anything much about finance they are just interested in commission.

    I learnt a hard lesson but it IS learnt.

    Yes everyone in the banking industry knew something like this WOULD happen. They just hoped it would be after they had made their money.

    Banks don't deal in investment they deal in profit from you. Don't expect them to look after your money, given the chance they will take it.

  • Comment number 64.

    Very clever move by the Socialists to keep the mortgage debt in State hands.

    The leftist policy goal of controlling how people are allowed travel, where they are allowed to live and what they can think makes a leap closer.

  • Comment number 65.

    Some have posted that there is no value in these BTL mortgages . Here are a couple of considerations to calm our views.

    1 real estate is a long game but in todays world 5 -8 years is a very long time!

    2 while sentiment in the buying market for homes of all sorts ( bar super prime ) is composed of fear and fear or recession our populations growth (ignoring immigration) has not gone away. Just look at the boom in rental markets in places like Warrington - full of flats but all letable at market rents. These people cant buy so must rent. Only some can stay at home. Therefore the sale price for these flats is way below the value of them for rent right now. That underpins the mortgages regardless of individual defaults by BTL landlords .

    3 There will be very very little new supply next year.

    4 If you can ride out the storm then all the teachers doctors etc that I know who bought these BTL's will do well in the medium term.

    5 Look at the rest of the continent . It has a bouyant traded institutional investment sector in residential. Dull but reliable ( safe and sensible) . This is where we should go in my view.

    Interseting times though.

  • Comment number 66.

    This comment has been referred for further consideration. Explain.

  • Comment number 67.

    One thing that isn't coming out that will affect many having difficulty with mortgage payments is that if you hand in your keys, that isn't the end of it. Your loan provider will then sell the house - if it can - but after the sale and removal of their expenses, if there isn't enough left to pay off your mortgage they can still pursue you for the remainder of your debt, and they probably will. Stopping paying and handing in your keys isn't a solution. You are better off dealing with the sale yourself as that will minmise costs and reduce your overall debt.

  • Comment number 68.

    What you say is both interesting and telling. This whole crisis can be traced back to Thatcher and those who seek to just blame Brown for the mess are deluding themselves. In fact, I really can't be bothered listening to either the Tories or the Lib Dems on what they wold now do differently since they, like Labour, were in complete accord with the Free Market philosophy that got us here.

    I wonder when the penny will drop and our political and economic masters finally realize that there is no way out of this situation by simply following the old rule book?

    We need to recognize that systems, of which capitalism is one, are simply mechanisms and therefore only as good as the societal models that they operate within.

    We need to adopt a more ethically-centred approach, which determines what a good and decent society values, e.g. that supports and can adequately afford healthcare for all and not one based on a postcode lottery; pensions to enable the old and infirm to live comfortable and meaningful lives, and not face a bleak and uncertain future; community structures that enable the young to feel active and participative members of society rather than pariahs; a system of reward that ensures that people from all walks of life receive a fair and equitable wage, irrespective of whether they work in the city or in supermarkets; that sees property as a place to live not to make money from etc.

    When we finally wake up and appreciate that society is, first and foremost, about people not markets then we might start to build a society where everyone can play an equal part and not suffer the whims and follies of the intellectually bright, but emotionally stupid elite.

  • Comment number 69.

    The trouble for folks arguing in market prices for property is that there already is someone living in those properties !

    So for a first time buyer to buy, someone needs to be made Homeless!

    So to solve this more Housing needs to be built.

    Bad luck lack of mortgages means no building.

  • Comment number 70.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 71.

    Why are Ministers not being asked in interviews, why, if debts can be nationalised, profitable sections of failing banks can't also be nationalised? Why is the public purse only taking the losses?


  • Comment number 72.

    #44

    No one will be turned out of their house, they might loose title to the house (but they would have done so anyway if they default), the only thing that will happen is that they Will start paying a fair rent instead of a mortgage repayment for living in the house - of course if they can't even afford the fair rent they need to down-size or apply for housing benifits...

  • Comment number 73.

    This will put the buy-to-let market into meltdown won't it: can see a lot of amateur punters getting burnt. Incidentally, what happens to holders of PIB's ?

  • Comment number 74.

    Robert, what are you on about?

    The sub-prime problem is the tip of the iceberg - what about all the Alt-A mortgages, the commercial property bubble, the CDO, CDS and SIV bubbles - all adding up to hundreds of trillions of dollars - much of which is stuffed into our banks, pension funds and insurance companies?

    Is your new remit from the gov't to keep us all calm while the house of cards collapses?

  • Comment number 75.

    #68 ? Why stop at Thatcher, what about coming off the gold standard or floating exchange rate ? As for the plea for social equity...well a bunch of guys in Russia tried that, ended with Stalin. Ditto China (oops hello Mao), Cuba .....I am afraid the world is one big schoolyard and everyone is in a gang to avoid the bullies. I can't be bothered listening to politicians either, nor to you as you sound just like one.

  • Comment number 76.

    Actually in order to make Britain competitive in the International marketplace, salaries will have to come down.

    So we will either have very considerable Inflation or actual pay cuts.

    It may be that Labour or a future Government will actually cut the minimum wage.

  • Comment number 77.

    It would be interesting to know why the Ratings Agencies have not yet been brought to book for passing Bonds as good, which were not good at all?

  • Comment number 78.

    Re Post 60 - very sensible comments, I have seen the amount of repo's out there recently, UK Housing market has just been overvalued for 10 years due to shortage of homes.

    Re Post 63 - why did you pay 5% commission when you could have paid less than 1%, and why follow the herd when financial colums were warning of the Dot Com bubble for 4 months before. The idea is to get in the market as it is in early stages of a rise, not at the top when the big traders have talked up the share prices and already sold their holdings.

    Re moans against BTL investors - most BTL investors only put their already taxed income into buying investment homes because pensions were such a bad deal after dear GB started raiding pension funds by taxing them more in 1997.
    Again BTL investors had ther hands tied with CGT on gains (tax on tax) but should have got out when warnings were being made in the last 9 months, April was a good time to exchange with reduced 18% CGT rate. BTL is a gamble, same as investing in shares but if you don't gamble what chance have you got of making a decent living here.
    JOB stands for Just Over Broke....

  • Comment number 79.

    And what about an investigation into the role played by Anlysts talking down companies that are vulnerable?

    And it appears a lot of short positions still existed in B and B last week, despite the ban on shortselling !

    The Public and the country are being robbed by some very clever people.

  • Comment number 80.

    You are a dangerous man Mr Preston. I suspect it is from the concepts that you have introduced and phases that you have invented that has helped precipitate the massive loss of confidence in our banking system.

    In this article for instance you state that "exposure to mortgages that are expected to be a big source of future losses". Who thinks this? Analysts do not think this. Indeed analysts predict a modest profit at the Bradford and Bingley of 4.71p per share this year and a small loss next year of -3.2p per share (http://www.reuters.com/finance/stocks/estimates?symbol=BB.L). Hardly unmanagable losses.

    Bradford and Bingley has made significant profits over the past 7 years and one would expect it to make significant profit again. House prices may go up or down but the world remains fundermentally unchanged.

  • Comment number 81.

    Ignoring whether it would be "right or wrong", what would the effect be of paying £2 a share for B and B shares.
    Would it underpin all other bank shares, preventing a repeat of this scenario next month/next bank.No bank share would then collapse like this.
    If we have to throw tax money at this problem, let's get some benefit and/or lose some liabilities for our money.
    If the £2 a share (and an interim Northern Rock payment) were to be made, immediately, (in shares of any "rescue involved" bank), wouldn't some of this stick, helping the capitalisation of that bank and easing off the pressure a little.
    Compensation might have to be paid under EU law anyway and huge litigation costs benefit neither the taxpayer, nor the shareholders.
    If we need the banks to recapitalise, then perhaps we should be suspending stamp duty on bank share purchases and immediately paying B and B and Northern Rock shareholders to "prove" that holding banks' shares is not a mugs game.
    Again, ignoring the "rights and wrongs" of bank share shorting, perhaps now all shorters should be made to close their positions, to encourage bank share ownership among the general public and institutions.
    We need to change sentiment to owning bank shares to positive, that will help their capitalisation and stop the ratchet tightening and the hunt for "the next worst bank".

  • Comment number 82.

    #60

    I think there is a bigger problem with self-cert mortgages than you suggest.

    In the old days (a couple of years ago) it seemed perfectly proper to put an inflated income figure on a self-cert mortgage application because you 'knew' you were not cheating anyone.

    You fully expected to be able to keep up the mortgage repayments (and your income was rising) and - even if the worst happened and the property had to be sold - it would be sold at a profit, the lender would be repaid in full and the borrower would have profited from his investment.

    Mortgage brokers certainly had a hand in egging some people on to submit inflated income figures.

    But all these 'obviously true' statements are no longer true at all.

    It is also the case that a minority of self-cert mortgage applicants were people who, in truth, had no legitimate income at all. Some such people were prepared to blatantly lie to get a mortgage, and found that they could get a mortgage via self-cert.

    So, to my mind, in these difficult times there are considerable problems for lenders (and borrowers) in relation to self-cert mortgages.

  • Comment number 83.

    @72, Boilerplate

    You're looking at this much as many look at a sausage - with little thought to actual content.

    You'll have people on the social housing queue wanting to know why they don't get first dibs, they'll see it as hand outs to the middle class if the original owners get to stay in the house.

    Some councils will just turf people out and send them to the back of the queue.

    You'll also have those who've been paying their mortgages for some time, fallen behind and have their house repossessed. They'll feel pretty hard done by, especially since they'll be laying the blame right at Labours feet for their change in circumstance.

    There are oodles of possibilities, and few actually reflect well on the government.

    It's a no-win situation politically, and one begging for tagline.

    "Labour, Labour, House Filcher"? Not as snazzy as "Thatcher, Thatcher, Milk Snatcher" though, but I'm sure some tabloid wit will come up with something.

  • Comment number 84.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 85.

    Problem - Housing market will continue to slide exposing more not less problems. First time buyers shunning market worried about further slides and difficulty in raising a mortgage. Buy to Let recruited to fill the first time buyer hole but now blow away. Can't see anything to provoke pick up until current mess out of the way and it is felt bottom has been reached. Whether anybody likes it or not the housing market is very embedded in the economy. Just making mortgages available is only part of it. National debt now tied to housing market values also.

  • Comment number 86.

    #31

    Agree entirely. People want the benefits of free markets but none of the drawbacks. I didn't see any of the people I know who own houses complaining when the prices were increasing.

    A labour government for the man in the street would have stopped the bubble and managed growth for the benefit of all. It would have slowed down the house price increase by taxing the buy to let out of the marketplace. This would have caused some slowdown in growth, but at a time when it could be managed better.

    Rightly or wrongly, people in the UK believe they have a right to own their own property. Governments should understand this. "Teflon" Tony and "Get it in the neck" Gordon had plently of chance (10 years) to do something but did nothing, presumably because of the short term political benefits.

    The irony is most people are now looking to the Tories to improve the situation. Now correct me if I'm wrong, but aren't they the party of the buy to let brigade ? Or will they gain government by adopting left wing policies in an ironic reversal of what happened when Nu Labour came to power ?

    Personally I'm going to be watching out for "Teflon" Tonys next move. After all he called the top of the market well enough.

  • Comment number 87.

    Isn't the whole thing really a 'valuation' crisis. Probably should have guessed the sytem was messed up when you need MiT maths Ph.D's to establish 'value'. So now no-one knows how to value a swap, a bank's equity or even a house. Now a potato, that I can value.

  • Comment number 88.

    Downside of the way they are nationalising B and B?

    It seems to me that the way in which are nationalising B and B may limit the foreclosure pressure that a normal bank would be under. This will keep UK house prices from falling as much as quickly - as they should. Thus prolonging the depression.

  • Comment number 89.

    RealEstratejohn

    Thank goodness someone has made a sensible comment. Lots of BTL bashing on here from people who don't understand what they're talking about. Many BTL investors are providing a much needed service for those that want to rent and have actually made sensible investments in good property in sought-after locations and will ride out this storm. I'm sorry but you haven't seen the end of BTL.

  • Comment number 90.

    Re 81

    NR shares compenastion covered in bill by assessor mechanism, as NR bust not much. BB would be similar assessor mechanism if same bill not zero but not high. The litigation EU law thing is not helpful to speedy resolution which many shareholders will want so swallowing lower price than liked most probable. Practicality of situation. If you have never queued for high court you have no idea how bad it is or what the cost are. If likely House of Lords x3+.

  • Comment number 91.

    Your blog highlights the aspect of building societies being carpet bagged into becoming banks. There is, however another important issue.

    The stockmarket - or more importantly the institutional investors - want high returns from all companies. Some companies work in sectors that are inherently risky so give high returns to match the high risk.

    There does not seem to be a place in the stock market for a low risk low return company. Time and time again the investors take what should be a low risk company like a former building society or a utility company and force it to create new risks in order to make a high return. If they do not then the directors are thrown out by the investors and replaced by new directors who will produce the high returns. All goes well untill something goes wrong and there needs to be a bail out. And those same shareholders are screaming that they have losty their money.

    Let us have a mechanism for a low risk low return company. They would be somthing between government bonds and the stockmarket that we have come to know.

  • Comment number 92.

    81:

    It almost seems the whole point of the last years shortselling and market manipulation, including the closure of the moneymarkets, has been in order to undermine and take over the ex building societies.

    To pay the Shareholders or Pension funds any money would defeat the object of stealing the business.

    In a few years the stolen elements will probably turn up as profitable businesses in someone elses ownership.

  • Comment number 93.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 94.

    @ no. 80

    LOLOLOLOLOL

    How far behind current events are you.....???

  • Comment number 95.

    I just don't believe that this is the end of the problem for British banking institutions. Why did Paulson and Co (the hedge fund) place a £1 billion bet recently on more British banking failures (of which HBOS was just one)? That's one hell of a bet to get wrong. We need to see how the markets react to Hank Paulson's TARP next week and beyond. The end of this mess will only start to be truly known – with hindsight - once the impact of the self-inflicted disaster in the banking industry flushes through to the real economy - and it will certainly come. The casualty rate will be high (public sector service cuts, tax increases, inflation, house repossessions, unemployment and perhaps even social unrest). Don’t forget too that the UK has an impending energy crisis, hence the panic-stricken rush into nuclear (the lights could well be going out in 5 years or so). And, moreover, mankind has reached the end of the era of cheap energy, the implications of which will soon make this financial crisis look like a cakewalk. So, it really is difficult to believe that the UK banking industry is through the worst when we haven’t the faintest idea what’s hiding in the US financial black-hole.

  • Comment number 96.

    @50 Frank-Castle

    Thanks; it was an amersand in the text. Conspiracy theory dashed (and good job too)!

  • Comment number 97.

    All of this has been predictable for a long, long time.

    A key indicator is the house-price-to-average-earnings ratio, which has been way overbought for years.

    Self-cert is daft - even the self employed can produced audited income statements.

    BTL exploited the differential between rents and excessively low interest rates.

    Mortgages at over 3.5x earnings, LTVs of over 85 percent, were problems waiting to happen.

    On some of these measures, house prices are likely to bottom out at least 40 percent below the peak.

  • Comment number 98.

    80, 94:

    I suspect the analyst earnings consensus excludes non-recurring items, i.e. write-downs.......

  • Comment number 99.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 100.

    This comment was removed because the moderators found it broke the house rules. Explain.

 

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