Saturday, 7 June 2008

Mortgages - risk free lending?

Why did banks pump so much money into the housing market? The chart gives the answer. For the last ten years, write-off rates on mortgages have been virtually zero.

Regular readers might be asking - didn't we see this chart a few days ago. Yes, I did post something on banking sector write-offs. Then, I posted details on write-offs in terms of totals sterling amounts. However, this data expresses write-offs in terms of average stock of lending.

Care is needed when reading this chart. The two data series are not directly comparable. Mortgage write off rates are so low that it needs a separate axis. In 2007, write-offs were less than 0.02 percent of the total stock of mortgage loans.

In contrast, credit card write-offs are huge. In 2007, write-offs amounted to about 7 percent of the total stock of credit card debt.

For years, mortgage lending has appeared to be virtually risk free. However, that is about to change. Banks are beginning to understand that risk was hidden by appreciating house prices. Now that prices are falling, risk has returned with a vengeance.

8 comments:

Josh said...

It is a wonder that credit card lending is profitable. A 7 percent write off each year - that is very high!

London estate agent said...

You assert that risk is rising, but don't substantiate it. The facts here are simple - mortgage lending is low risk. This is because people will always want to own their home and they will continue to pay their mortgage. This basic fact will ensure that banks will soon return to mortgage lending and the housing market will recover.

London estate agent

Vodka drinker said...

LEA - you seem to like this site. Too much time on your hands?

VADO said...

Wait for this year's data. Those numbers are going to go skywards.

VADO said...

Wait for this year's data. Those numbers are going to go skywards.

Anonymous said...

risk free? Like Northern Rock risk free?

aSteve said...

The point is that credit card losses are likely the tip of the iceberg of general default. The first question credit card companies want to know is if you own your own house... There has been strong evidence that the financially stretched have started piling-up credit card debt... these are likely home owners clutching at straws in a hope to avoid loosing their homes.

Laplace77 said...

seen this?

The Guardian: Traders predict house prices will fall by 50% in four years

http://www.guardian.co.uk/business/2008/jun/09/housingmarket.houseprices