Britain Deals with Subprime Fallout

♠ Posted by Emmanuel in , at 8/30/2007 03:15:00 PM
What we have here are two stories dealing with the ongoing global fallout from the US subprime disaster-slash-contagion. Both of them focus on the UK. The first from Bloomberg deals with tightened credit standards for prospective homeowners in the UK in response to America's misadventures. It's not a welcome development for the British are already rather fond of debt like their American counterparts:
U.K. lenders responsible for 12 percent of the nation's mortgages are tightening standards for loans on house purchases, withdrawing offers and raising the cost for borrowers with less than perfect credit.

Merrill Lynch & Co.'s Mortgages Plc unit said yesterday that it raised its interest rates. Northern Rock Plc, the Newcastle upon Tyne building society that had 8.4 percent of the market last year, and Residential Capital Corp.'s GMAC-RFC unit, with a 3.5 percent share, said they stopped some offers and lifted costs for others. Deutsche Bank AG did the same, while two lenders backed by Investec Plc have stopped all subprime loans.

``There are some lenders who have pulled their current product range and not announced any new ones,'' said Ray Boulger, senior technical manager at Charcol Ltd., Britain's biggest online mortgage broker. ``Others have put up rates until they get little or no business.''

The changes add to evidence that homeowners are finding it more costly and difficult to borrow in Britain after a collapse in the U.S. mortgage market dried up credit around the world. That may hurt house prices, which tripled in the last decade to an average 198,915 pounds ($404,000) because banks were allowing homebuyers to take on loans of up to five times their income.

``The same person trying to get a mortgage will find the situation more difficult now than three months ago,'' said Fionnuala Earley, chief economist at Nationwide Building Society, the U.K.'s fifth-biggest home lender. ``Some lenders will reassess how much they want to lend. You're not going to stretch yourself for volume in a market you think is a little risky.''

U.K. consumers shoulder a record 1.35 trillion pounds in debt, the highest per capita among the Group of Seven nations. Mortgage lending hit a record in July, rising 13 percent over the year even as the Bank of England raised its benchmark interest rate to the highest in six years.

Nationwide Building Society said today that house price inflation eased to 9.6 percent from a year ago in August from 9.9 percent in July. Lenders approved 115,000 loans for house purchase last month, the same as in June, the central bank said in London today.

In the U.K., so-called subprime lending to homebuyers with a shaky credit history accounts for about 6 percent of the market, half the level of the U.S., according to the London-based Council of Mortgage Lenders.

``Subprime lending has been of a higher quality in the U.K.,'' said Kelvin Davidson, a property economist at Capital Economics Ltd., a London-based consultant. ``But the problems don't really emerge until the market starts to turn down.''

The Financial Services Authority, Britain's securities regulator, last month said it had studied 485 subprime loans and found that more than half were awarded to customers who were not required to provide evidence of their income. And with almost half the loans, the brokers involved failed to adequately assess the ability of borrowers to pay.

John McFall, a member of Parliament for the ruling Labour Party, said he has been pressing Bank of England Governor Mervyn King to study the risk subprime borrowing has on the economy. On Aug. 8, King said ``I don't think there's much evidence of major damage to loan performance in other markets'' outside the U.S.

``We're walking blind,'' McFall said in an interview. ``I don't think there's any systemic risk, but there will be pain.''

DB Mortgages, a unit of Frankfurt-based Deutsche Bank, said on Aug. 22 that had it raised interest rates by around 1 percentage point. The firm also said it wouldn't be offering loans to first-time buyers.

``We're reacting to market conditions,'' Peter Beaumont, deputy chief executive of Mortgages Plc, said in an interview on Aug. 29. The company demanded bigger deposits from borrowers and raised its interest rates.

Infinity Mortgages, funded by Investec Plc, and Unity Homeloans, which Investec set up in 2006, said they would not take on new business. Unity blamed ``adverse movements in the capital markets'' in an Aug. 10 statement. Infinity cited the cost of borrowing and the difficulty of selling on debt securities.

``We're the victims of the global situation,'' said Simon Biddle, head of marketing for Infinity. ``The spreads that are emerging in securities are absolutely huge.''

Northern Rock said on Aug. 23 that it raised some rates and withdrew some of its subprime offers. Ron Stout, a spokesman for the company, said the changes weren't unusual.

Edinburgh-based HBOS Plc, the nation's biggest mortgage lender, hasn't changed its offers lately, said spokesman Mark Hemingway.

The lenders are concerned about increasing default rates in the U.K. A record 30,075 people in England and Wales declared themselves bankrupt in the first quarter, up 24 percent from a year ago, according to government figures.

So far, the lending squeeze hasn't slowed the broader market. In June, 102,000 loans were made for home purchase, the most since November, according to the CML. The lobby group doesn't identify how many were subprime loans.

Even so, higher costs to some borrowers will further inch up the cost of servicing a mortgage, which already is at its highest since 1992, according to Citigroup Inc.

``The longer the situation persists, the more likely it is that we do see the credit crunch feeding through to new borrowers,'' said George Buckley, chief U.K. economist at Deutsche Bank in London.

Next, the Financial Times noted in an earlier article how London property prices--which have been extraordinarily robust--may finally be felled by subprime. As the City of London-based financial services industry encounters tighter credit conditions, fat salaries, fees, and commissions emanating from elevated levels of financial activity may be endangered. In this manner, high-end demand for very pricey London prime addresses may fall:

Fears are growing that the fallout from the US subprime mortgage meltdown will hit house prices in central London, one of the world's hottest high-end property markets.

Prices for "prime" homes in the most expensive streets of the capital have risen about 50 per cent in the past two years as a financial services boom has enriched bankers and other professionals in the City of London.

But the global market turmoil unleashed by the US subprime collapse is threatening activity levels at banks in the City, and London property agents are warning that high-end residential prices could suffer as result.

"If there is a downturn in City profits and employment levels, you couldn't be surprised if central London prices fall," said Liam Bailey, head of research at Knight Frank, the property consultancy.

The importance of the City to the economy was underlined as official figures showed business services contributed over half the economic growth in the second quarter of the year.

Mr Bailey said there had long been a correlation between the health of the City and London residential prices. The prime London market suffered badly in 2002 and 2003 after prices of technology and telecommunications shares crashed.

John Young of Humberts, a London estate agent, said the recent "uneasiness" in the City had prompted several deals to fall through. Tracy Kellett, founder of BDI Home Finders in London, a buying agent, said some sellers were dropping prices.

David Forbes, a director of agents Savills in its posh Knightsbridge office, said it was too early to call the market.

Charles Ellingworth of Property Vision, an adviser to home buyers, said City "tremors" had a "huge impact" on buyers' confidence. "We are not seeing panic yet but the closest comparison we have is that this feels remarkably like August 1998."

But in a word of well-deserved caution, given the strength of the rebound after the 1998 financial crisis, he added: "For three months, we didn't do a deal then suddenly in November it all came back to life and we had the two busiest months ever."