Like the mortgage crisis never happened.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
As the UK housing market is facing serious challenges, a high-risk relic of the last housing bubble is staging a big comeback: the interest-only mortgage. This financial product, often held up as the epitome of irresponsible lending, is hitting the market at a faster rate than at any time since the 2008 financial crisis.There are now 193 of these mortgage products available — almost double the 102 that existed six years ago.
With these mortgages, the borrower pays only the interest on the loan but makes no principal payments, and therefore doesn’t built up equity in the property. At the end of the loan’s term, the full balance becomes due all at once. Borrowers are supposed to have an investment plan in place, such as an endowment policy, to pay off the debt. But many of these policies have under-performed, meaning that borrowers now face a shortfall.
If borrowers cannot refinance the mortgage or make other arrangements with the lender, they will end up losing their homes. Given that an estimated one in five UK mortgage holders has an interest-only loan, working out at a grand total of around 1.7 million mortgages with an aggregate value of £250 billion, this could be a serious problem.
It’s unclear how many of the debtors will actually be able to pay off the principal once it comes due. Those in homes with negative equity may be offered a lifetime mortgage, which will allow them to keep making payments on their home until the day they die, at which point the bank takes possession of the property.
Some lenders may offer borrowers the chance to extend the term of the mortgage while switching the loan to a repayment basis. But this is likely to be financially crippling for many. In an example provided by the Financial Conduct Authority (FCA), an elderly couple is accustomed to paying £313 a month on their 25-year, £125,000 interest-only mortgage. But if, on the loan’s maturity, the lender extends the term of the contract by 10 years and switches it to repayment, their monthly payments would increase almost 400% to £1,208, assuming a 3% interest rate.
As the clock runs down, frantic efforts are being made to avert — or perhaps profit from — another mortgage crisis. A few days ago the FT reported that the asset management company Spicerhaart Corporate Sales has partnered with fact-finding firm Excel and law firm TLT to create a solution for lenders and customers who have no plan in place to pay off their mortgage:
“The firms will look at the customer’s financial situation, the property value and the mortgage market and aim to deliver a ‘clear strategy’ for the lender within 90 days. Options for consumers could include a repayment plan, conversion, a remortgage, a property sale, or litigation.”
Yet even as thousands of elderly borrowers struggle to pay off their mortgages, banks and building societies are breathing life into a whole new generation of interest-only mortgages, whose product range has almost doubled in the past six years.
For the moment, this has not been matched by a corresponding rise in demand for the high-risk product. On the contrary, the number of consumers taking out interest-only policies has fallen by 9% over the last six years, according to data published by the FCA and the Bank of England. Borrowers, it seems, are now warier of this high-risk loan.
The same cannot be said of the infamous 0%-down mortgage, which helped fuel the UK’s last madcap property boom-and-bust. After ten years in the financial wilderness, this loan product is being brought back to life by high street banks such as Lloyds, which in January unveiled an adjustable-rate mortgage with no down-payment and a teaser-interest rate for the first three years of just 2.99%.
The mortgage allows buyers in England and Wales to borrow the entire amount of the purchase price of up to £500,000 ($653,000). The 2.99% is only a teaser rate, and once the first three years are up, payments can rise precipitously. In one example cited by the bank, the payment jumped by nearly 14%. To take this example to a place in London, purchased for £500,000, the monthly payment would go up by £296 ($386) a month.
The Lloyds deal also comes with a parental twist. For customers to qualify, they must have a family member (or members) willing and able to place an amount equivalent to 10% of the loan value in a Lloyds savings account for three years as security, where it will accrue 2.5% interest. If the borrower fails to make repayments in the first three years, the family member loses the deposit.
The consumer organization Which has identified seven similar mortgage deals being marketed by other lenders, including Barclays. Another ten lenders, including the recently privatized Post Office, are allowing family members to put up part of their own home as security for a 0%-down mortgage, meaning that if the lender has to repossess and sell the newly purchased property for less than the remaining mortgage amount, the family member could also lose their home.
Mortgages for 100% of the purchase price not only help fuel dangerous housing bubbles, they also make them a lot riskier when home prices fall, leaving more and more borrowers with negative equity – where the home is worth less than its mortgage. At this point, homeowners cannot sell the home unless they put more of their own cash into the deal, which is precisely what most of these homeowners cannot do. Despite this fact, almost half of the UK population think re-introducing 100 per cent mortgages is a good idea, compared to 32% who thing it’s a bad idea, according to a Yougov poll.
Mortgages for 100% of the purchase price not only help fuel housing bubbles, they also make them a lot riskier when home prices fall, leaving more and more borrowers with negative equity – where the home is worth less than its mortgage. At this point, homeowners cannot sell the home unless they put more of their own cash into the deal, which is precisely what most of these homeowners cannot do. Despite this fact, according to a Yougov poll, almost half of the UK population think re-introducing zero-down mortgages is a good idea. The banks will be happy to be oblige. By Don Quijones.
This time it’s about the safe deposit boxes at Metro Bank. Read… After Shares Collapse, Mini Bank-Run Begins as UK Lender Counts Cost of Broken Trust
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Actually, the banks should be taking more mortgage risk. Look at what happened. The media threw every negative story at housing they could. And, they scared many buyers away. But the effect on prices was minimal. Good properties are still getting hit with multiple offers. Now, there is a dam building of buyers who decided to wait, and when they realize they made a mistake, there will be a price spike. Banks should be holding more mortgage risk.
I admire the consistency of your commentary!
Here in the Boston area my boss put his house for sale in Taunton. It sold the first day on the market with 3 offers above asking. But Case Shiller says Boston prices are falling because reasons. Guess I’m just not seeing in my area.
Pack it up boys, timbers gave us one anecdote, the data-based Case Shiller index is therefore wrong.
In Wellesley, ( Boston Area ), most homes under 1.5M in a good location sell rapidly, some with multiple offers. Prices are definitely moving up, but Case Shiller says they are falling. Joke.
I live here. I have been watching metrowest (Newton, Natick, Wellesley) closely all spring. What you describe is not what’s happening at all.
sc7, your opinion runs counter to what is being reported by Boston realtors. Higher prices with higher sales volume has been reported all year. Newton is doing very well.
If the house is priced right, it will sell in any market. If it’s priced wrong it will sit. You price it where the buyers are, it’s gone in no time. You price it where your hopes are, you’ll never sell it.
But, but, but… if you price it where the buyers are, you might have to price it below the price where the buyers were six months ago.
LOL this has to be a troll post…
So true. In 2008, just before an election where the Republicans held power, the media ran non-stop house bubble stories and created a financial panic. All the idiots walked away from their homes.
In 2018, just before an election where the Republicans held power, the media ran lots of non-stop house bubble stories and the effect was minimal.
You know where this leads … in 2020, get ready for the media pumping house bubble stories because Republicans hold power.
Seems to me there is a possibility that house bubble stories are an election trick meant to undermine people’s confidence in the economy just before an election where Republicans are in power.
Fool me once, shame on you. Fool me twice, shame on me.
“All the idiots walked away from their homes”..?
Masked slipped a bit there, Jimbo….
How is being foreclosed walking away?
I started working construction in 2007 and I can assure you the downturn was very real. New projects just stopped coming.
Right now there’s still plenty of projects going on. I understand the mistrust of reported data related to your own experience though. The economy today is wacky – if you’re a bull or a bear you’ll find plenty of data to support your case. I don’t think the data is faked, but I do think that massive worldwide QE has messed with the typical signals and caused a lot of distortions.
One thing I’m still sure of – real estate will be a loser investment over the next decade for a simple reason … State pension funds can’t pay their obligations if they’re stuck in a low interest rate & low growth world. This happened in Chicago already and they hiked property taxes to help with the shortfall, which put a damper on their property values. Other states will follow that same course to back their pension funds.
I don’t expect anything like the real estate crash we saw 10 years ago, but I’d still recommend focusing on personal reasons rather than investment reasons when buying property.
Good Lord. Reckless beyond belief.
Add a final Droit du Seigneur clause to these mortgages and the cycle back to serfdom will be complete.
Funny! I was thinking of saying they’ll mortgage daughters next.
Is the first comment sarc or part of Magic Monetary Theory?
If they do mortgage daughters call me when they go to foreclosure.
Walk down an average British high street: Droit du Seigneur is not something one would care to exercise in most instances.
I’d quite like it in Spain, though……
The Bank of Canada blinked after imposing ‘strict’ qualification for mortgages (i.e. 20% down and a stress test for the possibility of higher rates) and the market took a dip, at least in some of the hot markets.
They are asking the banks to consider ‘creative’ financing, including co-ownership by lenders. The idea is that down payments would be reduced and the bank would own some percentage of the equity; when you sell they take their 40% or whatever portion of any equity.
Metaphorical Droit du Seigneur?
“Another ten lenders, including the recently privatized Post Office, are allowing family members to put up part of their own home as security for a 0%-down mortgage, meaning that if the lender has to repossess and sell the newly purchased property for less than the remaining mortgage amount, the family member could also lose their home.”
Insanity on the part of a family member who would risk his own house to help his kin buy something they clearly cannot afford to begin with.
Sometimes you have to gamble to get the kids out of the house … the gamble here is that instead of the common practice of giving them the down payment and probably never getting it back, you may actually get your deposit back.
I used to live in the UK, and have owned houses on mortgages from 1987 to 2007. Zero down mortgages are fine, I’ve had two. Interest-only mortgages are fine, I’ve had two of those as well. The problems are not and never have been the products, but who they are given to and on what basis. What convinced me the crash was going to happen in 2008 (which is why I got out) was a friend of mine, self-employed, getting rejected for a mortgage in 2006. The lending agent told him his income needed to be x thousand higher for his status, and that he should resubmit with that higher amount as his stated income, and it would not be checked. And it wasn’t. The income wasn’t a problem for him, as he was an acknowledged expert at what he did and had work coming out of his ears, but they were saying the same to a lot of people. The problem is dishonesty within the financial institutions, which the senior management know d@mn well is happening because they set sales targets which force their agents to be dishonest. And I have worked for a UK insurer so I have seen this first-hand. And the Government oversight was a joke. And the situation in both respects is worse now than it was then; one look at Wells Fargo tells you that.
The UK market is only really bubbling when the builders begin to offer 120% mortgages in order to unload inventory.
Wow! IO loans again. You know the real estate market is in extreme danger when these land mines start showing up again.
100% loans just as nutty.
Now all we need do is toss in fraudulent loan processing by the lenders and it’s 2005-2007 all over again.
Now just wait for the Chinese to start selling everything, offering prices be damned. It’s coming. Good luck U.K.
The great Chinese selloff when China’s economy implodes is really going to make this bubble blow.
Lax lending standards don’t benefit the buyers as much as they do the sellers.
This is a crystal-clear example of what regulators should be (literally) outlawing, not encouraging. This is pure financial Russian roulette.
I rarely subscribe to “in loco parentis” regulations, but time after time after time, and in various nations, these products have proven to be toxic to individuals, banks and taxpayers. Approval of these products represents pure regulatory negligence, for which taxpayers have no effective remedy
Yes they do. It’s called holding the government accountable for bailing out bad actors. Since nobody did that last time, it’s going to happen again.
The interest only borrower is a mere tenant in the Banks house.
Interest only Mortgages are a useful cash management tool for people rehabbing or flipping houses.
As long as you don’t buy near the top of the market…
Back in 2008 in the UK we had 125% mortgages.
The interest only mortgages are not actually a problem for people and banks for people that took them out 20 years ago due to house inflation in London and SE England.
To give you an idea.
I bought a 4 bed house in 1987 for £120,000.
I had an interest only mortgage of £90,000
Today that house is worth more than £600,000.
So if there was still a £90,000 mortgage on that property, there is now 85% equity in that property so absolutely no risk to any bank.
The monthly interest only payments would be about £220 per month.
Mimimum wage is £8.25 per hour in the UK so would take less than 30 hours per month to earn the interest payment.
Renting a double bedroom in the house would give you £500 per month tax free.
It only worked because the central banks pumped the asset bubble by consistently dropping rates.
Sweden. Check out how mortgages work there …. and check out the state of their housing market in the big cities.
Yeah, 20 to 30 years on a waiting list to rent, unless you want to live in the bush.
At this point, US housing is outperforming stocks and bonds major market indices … no question about that. So from a US standpoint, lose mortgage standards are not a problem as long as the buyer is a good credit risk.
The only issue I see is in properties north of 3M. It is most likely this problem is tax law related … we will see. In Socal beach towns, under low 2M to sometimes mid 2M is fairly strong where most stuff sells. However once you break through the 3M price, it is definitely slow. Some realtors are telling me it is more than just a tax law issue …. they claim the younger wave of buyers do not like massive homes as much as the last generation. But, in towns like Manhattan Beach and Santa Monica, everyone agrees that usually all prices ranges are strong or weak … this split price range activity where the 2.2M house goes quickly while the 5M house next door has no bid is a different animal that has not been seen before.
Then there is the technical issue … it is all but guaranteed that the Republican hating media will pump out house price bubble stories non-stop in less than 1 year, and this onslaught of stories will undermine the confidence in the housing market. So, if you are in the market for that 4M dollar beach close home, you have to consider holding off on buying until we get closer to the election. But, if your price range is much lower, then you might be better off buying now, but only if a great enough deal appears.
Hi David Lereah! Buy now before you’re priced out forever. Housing only goes up, up up!
That is not what I said. I said the very high end is having a problem and you might be wise to wait that one out. And, I said the lower and mid range stuff is doing fine. That is a mixed picture.
Every 8-10 years the Wall Street-Federal Reserve Looting Syndicate pulls off a pump & dump in these rigged, manipulated “markets” to financially strip-mine the vanishing middle class and transfer their wealth and assets to the Fed’s oligarch accomplices. We’re about due for another epic Great Muppet Reaping, so I think I’ll disagree with your sanguine view on the “lower and midrange stuff” which is going to get hammered along with everything else in the event of another 2008 style financial crisis. We are overdue – and this time around the Fed has already blown its wad on ten years of “emergency measures” that benefited only its Wall Street grifter partners in crime. The Great Reset is coming, and I’m sitting out the madness until the long-deferred financial reckoning day has laid waste to the Fed’s asset bubbles and Ponzi markets, and flushed the toxic waste and speculative excesses out of our financial system.
Getting tired of living on ramen noddles, Realtor Boy? Trying to drum up a little business? Sorry, no one here is buying the NAR snake oil that now is always the best time to buy, on the cusp of the implosion of the Fed’s Everything Bubble.
SocalJim does sound a lot like a realtor. I have been attempting to offload some properties in Southern California with no success. I have finally decided to keep them as rental income. The markets now feel very similar to 2008 and his comments do not line up with my current experience.
The MSM bemoans that fact that “far right” parties, despite their demonization in the globalist media, are gaining popularity and support among young people in Europe. Imagine that – young people rejecting a future as serfs on the globalists’ incorporated neoliberal plantation and amalgamation into a multicultural open-borders cultural wasteland to opt for a future with dignity, hope, and a distinct historic identity. The elites and their quisling Establishment parties and media border collies aren’t going to like this one bit. Neither will the central bankers and the corrupt and venal .1% in the financial sector who have been the sole beneficiaries of their “No Billionaire Left Behind” monetary policies.
Gershon- I sure like your comments. Hopefully the young can effectively establish fintech work-arounds to counter the monopolies. However, the moats that the top 3 have established- especially due to shipping, and supply-chain dominance factors internationally- can really be the stumbling block. Small vendors and small consumers can strategize their activities, but the real control is any transportation costs from pointA to pointB. There are a select few that really control the routes. The present tariff for turf access is really a fight between the few. The many are going to be confronting gatekeepers at every matrix point.
That’ The only solution you’ve got left Lisa!
But to do that you’ll need to be living on land ( in the bush so to speak).
So you can’t really fight this financial system by buying into the convoluted ideas that has made it the way it is so far.( fintech won’t save the day).
A return to the hippie commune ?
Actually that wouldn’t be such a bad medicine to the profligate BS that has been shoved down the throats of the two thirds of society !
What other ways does the poor have left that can be exercised?
Bar a 17th century French Revolution!
You still have the statue-of liberty to look to for inspiration:)
Are UK mortgages recourse loans?
Re: recourse. Ireland in 2008 had the biggest RE bust of anywhere. See the first commenter saying the banks should take on more mortgage risk? Well in Ireland they did and it took down the 3 largest banks. Ireland itself had to get a mega- loan from the EU.
But about recourse. Ireland was and is by a mile the least debtor- friendly place in the developed world. A bankrupt is effectively barred from economic life for 7 years. He can’t leave the country without permission. But it mattered not a bit to the RE bust.
But at least Ireland is a unitary state not a federation.
In the US you have 50 different legal jurisdictions.
If the guy flees a mortgage in NY what does Colorado care?
Sure his credit rating will suffer but ‘recourse’ as in what?
Now if the guy owes millions and HAS millions it might be worth chasing him but in the vast majority of defaulted mortgages it would be a waste of money.
It is Bank of Ireland who are providing the Post Office mortgages.
Just vaguely curious about these interest only loans… the description make it seem like it is a dumber way to rent.
Or rather, depending on the loan terms, a smarter way. After all, since you technically are the “owner,” you can’t be evicted or kicked out as long as you’re paying off the interest. Unlike a simple rental would a landlord could decide to do a lot of things.
But the net effect here is that this is going to be a bubble that is in need of a prick at some point. Unless the spread of these interest only loan is over a sufficiently long period of time that there isn’t a tidal wave of default at some point.
Where I live, luxury homes that do not appeal to families with kids, e.g., no or vestigial backyard. Empty nest seniors buy these, nicely decorate, and entertain friends. These are 3,000 sqft. 3-4BR. Price drops from $990,000. Now $865000.
I should add that in this DC bedroom community, a similar home with a good fenced back yard would sell at $1.1 million or thereabouts. Families will pay at those prices.
Question: Are the banks in the UK holding the risky mortgages, or are they bundling them and selling them off?
If the latter, then the problem isn’t the banks; they are now simply commission salespeople, but the problem is the institutions and investors who buy the risky junk mortgage bundles.
Spot on. Follow the money to see who will be left holding the bag if a crash happens. Just like the US in the GFC.
Interest only mortgages are only a potential problem if
1 there is not a substantial down payment.
2 the interest payments are already close to the maximum the purchase can fund, critical in a lower rate lending environment.