Tuesday, 3 June 2008
mad for mortgages
Why did the banks go mad on mortgages? The answer lies with write-offs. For many years, mortgages have been a remarkably riskless activity.
Although the amounts of mortgage write-offs have crept up in recent years, the overall level remains rather low. For example, in the first quarter of this year, banks wrote off just ₤35 million.
Credit card debts are a very different matter. Banks have been writing off around ₤600 million a quarter. This goes a long way to explain those huge interest rates on credit cards.
Write offs on other loans, which includes credits to companies and small businesses is also creeping up. In a typical quarter, commercial banks write off around ₤700 million.
Why were mortgage write-offs so low? Higher property prices have concealed repayments difficulties and kept repossession rates down. If a borrower found it hard to repay their mortgage, higher property prices invariably ensured that the borrower had accumulaed some equity. Therefore, it was easy to sell and repay the bank rather than default. Even when banks were forced to repossess the house, the subsequent sale usually covered the initial mortgage. In summary, with rising property prices, banks simply couldn't lose money.
That has now changed. Prices are crashing and the option of a quick and quiet sale is no longer available to distressed borrowers. Just watch and wait; mortgage write-offs are about to explode.