Thursday, 21 June 2007

Where is the UK mortgage implode-o-meter

In the US, there is this great site called the mortgage implode-o-meter. It tracks the number of mortgage lenders that have gone belly-up since the housing crash took hold over there. Perhaps, someone should start a similar site over here. Unfortunately, private sector balance sheets might not be the only ones under some stress. Some of the banks and building societies could be in trouble.

Today, the Bradford & Bingley indicated that the future could be difficult. It warned that that the mortgage market is now slowing after a series of interest rate hikes, However, it couldn't resist the usual old spin - it protested that the buy-to-let sector will continue to outperform the mainstream market.

Ignoring the buy-to-let sales talk, Bradford and Bingley had some interesting things to say about today's mortgage market. Ominously, arrears were slightly up. Moreover, it complained that it had seen a "modest dilution" in its net interest margin. These are flashing red lights; indicating real problems down the road.

Take the arrears issue first. Employment is at an all time high, and already people are having difficulties covering their mortgages. What happens if there are one or two more interest rate hikes, and the economy slows? How will the heavily bloated and over-exposed mortgage sector handle a rise in mortgage arrears.

As the Bradford and Bingley point out, interest rate margins are tight, suggesting that mortgage companies will not have much room to absorb losses. Banking crises are ugly things, but with the appalling management of risk in the UK financial markets, don't be shocked if you wake up one morning to hear that one of the major building society is having a few liquidity problems.


Anonymous said...

someone already has, look at;

tom said...

It's a nice idea, but I don't think there'll be as many lenders going bust as in the US. We have a different model over here. In the states they have many smallish mortgage brokers who get their financing from banks, and it's the brokers that are going bust. In the UK we mainly get our mortgages direct from high street banks. If firms in the UK do go bust it's most likely to be people like Kensington or Ocean Finance, and maybe even Northern Rock, who are a pretty large bank but whose only business is selling mortgages (and repackaging the debt into RMB securities and selling it off).

Talking of securities, have you seen what's been happening in the CDO market in the last few days with the Bear Stearns subprime mortgage hedge funds? It's been the top story on bloomberg all day:

If this has legs and triggers a CDO repricing (or worse still a re-rating) we could be looking at a lot less money available to lend out on mortgages, and that means a credit crunch and a house price crash.

tom said...

Just to add on the CDO story, we've been discussing it in some detail on GHPC here:

Calculated risk has also had some pretty decent coverage of the story:

Anonymous said...

What Tom said.