This chart should give every banker in Britain nightmares. It tracks mortgage arrears greater than three months at the end of every year since 1995. In the case of 2008, it takes the number at the end of October.
Why is this chart so frightening. It illustrates a simple fact; mortgage arrears right now are not that high. Back in the 1995, almost 400,000 mortgages were in arrears, some 3.7 percent of the total. As of October 2008, only 168,000 are in distress; about 1.4 percent of all mortgages.
Yet, somehow the housing crash so far has wrecked the UK banking system. The RBS, Northern Rock and the Bradford and Bingley have all been nationalized; HBOS was swallowed up by Lloyds, and a string of smaller building societies have disappeared.
There is every reason to think that mortgage arrears will reach the levels seen in the mid-1990s. Can you imagine what a 4 percent mortgage default rate would do to our weakened banking system? Hence, the nightmares, sleepless nights and despair within the banking system. They know what is coming next.
The government better have some deep pockets, because this housing crash is going to be very expensive to clean up.