52% Drop in Bank Mortgage Approvals
The number of new mortgages for home buyers approved by the banks in the uk fell last year by 52%.
The British Bankers Association (BBA) said the number of these approvals went up from 17,000 in November to 22,000 last month.
However, this was still 47% down on December 2007.
The BBA said the December rise did not suggest a real recovery in lending and was “more likely to reflect delayed activity from November”.
“The banks approved less than half the 2007 number of loans for house purchase, reflecting falling demand from households facing greater economic uncertainty and double-digit falls in house prices over the year, which led to a wait-and-see mentality,” said David Dooks of the BBA.
The figures indicate that people were becoming more cautious about their borrowing and spending as 2008 came to an end.
The amount of money outstanding on credit cards dropped by £218m in December.
And bank customers continued to pay off more of their overdrafts and personal loans than they took on. Total outstanding borrowing dropped by another £135m, the fifth monthly fall in a row.
“Consumer credit was very weak in December as people reined in their credit card spending, despite early sales and heavy discounting by retailers,” said Mr Dooks.
“This consumer caution was also reflected in personal deposits, which rose strongly,” he added.
Despite rapidly falling interest rates, prices and sales appear still to be falling as the credit crunch continues to choke off the supply of mortgage funds, and lenders ration their available cash to only the most creditworthy of customers.
The property website Hometrack said that house prices in England and Wales continued to fall this month, for the sixteenth month in a row.
This was accompanied with another fall in the number of sales going through.
Another property website, Globrix, reported that the number of sellers cutting their asking price had jumped this month.
The number of price cuts more than doubled in the first three weeks of January compared with December.
More than 14,000 people did this, with the average reduction being just over £21,000.
Ruling Given on Some NatWest Bank Charges
Some customers of the NatWest bank might have a new opportunity to reclaim their bank overdraft charges.
A High Court judge has ruled that the bank’s terms and conditions, used from 2001 to July 2003, may have included unfair penalties for going overdrawn.
The ruling by Mr Justice Andrew Smith is one of a several in the long running test case on bank charges.
Most overdraft claims in county courts have been halted since July 2007 while the High Court resolves the issue.
“The court found that a single historic NatWest term prohibited customers from using a card to go overdrawn but this does not mean that that term is a penalty,” said a NatWest spokesman.
The consumers’ organisation Which? said in theory some NatWest customers could now ask their courts to reopen their claims, but warned it would not easy going.
“Firstly, the judge this week only said Natwest’s 2001 charges may be penalties, not that they are penalties,” said Which? lawyer, Chris Warner.
“This means the customer would need to show that the charges were actually penalties by proving that the charge did not reflect the bank’s costs.
“Also, as the issue of charges reflecting the cost to the bank is part of the OFT’s ongoing fairness assessment, Natwest may be able to convince the court to stay any cases brought against it until the OFT’s investigation is complete,” he added.
Marc Gander, of the Consumer Action Group (CAG), said some of his members were now thinking of returning to court, after being charged under the NatWest’s 2001 conditions.
“It affects personal and business customers, but only for a limited period of time,” he said.
“The bigger question is whether the contracts will be subject to the consumer contract regulations.”
The banking industry and the Office of Fair Trading (OFT) are waiting for the Appeal Court to hand down its judgement on a bank appeal against an earlier ruling by Mr Justice Smith.
Last year he dealt a blow to the right of banks to levy high overdraft charges when he decided that the 1999 regulations, regarding unfair terms in consumer contracts, gave the OFT the right to scrutinise those charges.
This week’s judgement by Mr Justice Smith was one of three residual decisions, made on whether or not charges levied under old or “historic” terms and conditions could also be penalties under common law, and therefore unrecoverable.
Last October he cleared most of the old contracts used by seven banks and the Nationwide building society, who are the parties to the test case with the OFT.
However he needed more time to consider some of the terms and conditions used in the past by the Abbey, Lloyds TSB and RBS NatWest.
This week he gave the first two of those banks the rulings they had been seeking; that their former current account conditions did not fall foul of common law.
But he found against the NatWest.
“I still consider the relevant term in the NatWest 2001 conditions to be contractual and to impose a contractual prohibition on the customer,” said the judge.
“I therefore remain unpersuaded that the relevant term in the NatWest 2001 conditions is not capable of being penal,” he added.
The significance of the judge’s decision is that if a clause in a contract imposes an obligation not to do something – such as not going overdrawn on a current account without permission – then any money charged for breaking that condition must not be more than is actually necessary to compensate the bank.
That is because under common law it is illegal for any penalty charges or fees, imposed by a business, to be excessive.
Campaigners have argued that typically it does not cost a bank more than about £2 to tell someone they have gone overdrawn and to repay their unauthorised borrowing.
In contrast, bank charges have sometimes been more than £30 each time a customer has gone into the red or had a cheque bounced.
“The OFT and RBS group are considering their positions pending finalisation of the order,” said an OFT spokeswoman.
This means either side could appeal, which might delay any attempt to start a case in the county courts.
And this week the Financial Services Authority (FSA) gave the banks another six months in which they could park any claims for the return of bank charges.
“The fact that the FSA’s waiver, which has just been extended by another six months, is still in place with the exception of financial hardship cases and it could be very difficult for anyone to make a successful claim at this stage,” said Chris Warner of Which?
The Number Of Possession Orders Granted Doubles
The number of people losing their homes after failing to meet their mortgage repayments has doubled almost, the UK’s financial watchdog has said.
The number of possession orders aproved by courts in the third quarter of 2008 was 13,161, up a massive 92% from a year earlier.
The Financial Services Authority also said the number of people struggling to clear home loan arrears has also risen.
Earlier this week, figures showed mortgage lending fell by 30% in 2008 its lowest level since 2002.
A possession order is when a lender is given legal control of a property by a court – though does not automatically lead to them taking the property and selling it on or evicting those living there.
The FSA said the number of homeowners who were about three months behind with their mortgage repayments had jumped to 340,000, a rise of 24% from a year earlier and 10% higher than in the previous quarter.
This was a “significant” jump from the previous quater, it added.
The FSA said that about 2.9% of all mortgage holders were now behind with their repayments – with those in arrears managing to pay an average of 42% of their normal mortgage payment each month.
Late last year, mortgage lenders predicted the downturn would lead to about 75,000 repossessions – close to levels seen during the last recession of 1991.
The Council of Mortgage Lenders (CML) also said that the number of households more than three months behind with their repayments would reach 500,000.
That would be more than double 2008’s figure, estimated at 210,000.
The government has announced a string of initiatives to try and keep people in their homes, amid rising unemployment and economic slowdown.
These include a scheme that sees not-for-profit housing associations buying homes from vulnerable people struggling to pay their mortgage and then allow them to continue living there.
Meanwhile, homeowners who lose their jobs are to receive financial help, with the interest payments on their mortgage being cut from 39 weeks to 13 weeks.
Another initiative, the Homeowner Mortgage Support Scheme, will allow households that see their income fall unexpectedly to defer part of their payments for up to two years.
And lenders are to be legally compelled to use repossession only as a last resort, having looked at other alternatives with the borrower, such as reducing monthly payments.
However housing charity Shelter said that the rescue schemes would “help just a small fraction of those in trouble”.
“While the government yet again bails out some of Britain’s floundering banks with billions of pounds, it is still seemingly unable to provide adequate support for millions of hard-working homeowners,” said chief executive Adam Sampson.
“These new figures are not just numbers, they are heartbreaking tales of real people losing their homes.”
Government and Bank Bosses to Discuss Mortgage Plan
The government could be set to step in and guarantee mortgage lending under a plan being discussed this weekend.
A lot of Britain’s top bankers are meeting at the prime minister’s country residence Chequers.
On the agenda is the possible implementation of the Crosby Report, which was published last November.
The plan contained recommendations for the government to provide guarantees on mortgage securities.
This is along the lines of the so-called “bad bank” solution, which US Treasury Secretary Hank Paulson envisaged last September when he persuaded the US Congress to provide $700bn in funding to buy tainted assets from banks in order to free up lending again.
The Treasury would guarantee bank bonds that used home loans as collateral.
Roughly £100bn in mortgages were provided using these types of investments in 2007 before the market imploded.
It is technically known as securitisation, and it is the collapse in this market that has dried up mortgage lending and overall confidence in the housing market.
Major players in this market have all but disappeared over the past 18 months, including a few major US banks, hedge funds and some sovereign wealth funds – state-owned investment trusts usually controlled by oil-rich Asian countries.
The Crosby report, by the former HBOS chief executive Sir James Crosby, envisaged that the government would auction mortgage guarantees to the highest bidder and charge a fee to the eventual winner, on the condition that they would provide home loans to first-time buyers and not to remortgaging customers.
The problem up to now as been that any guarantees that the government has offered to banks have come with lots of strings and high fees attached.
Speaking to the BBC, a senior bank executive described fees up to this as “usury” and “a disincentive to lend”.
So one of the discussion points this weekend will no doubt be how much the government will charge banks for these precious guarantees.
Too little and the banks would make too much money, which would be politically unacceptable. Too much and the banks wont take up the scheme and lending will remain available to the very rich.
There’s also been talk of extending these guarantees to small businesses, though that was not mentioned in the Crosby report.
The issue of mortgage guarantees needs to get sorted out soon though, as the housing market declines and the economy weakens substantially.
“We need to move quickly – even within the next fortnight so that banks can start increasing the flow of money to potential mortgage holders”, the senior banking executive told the BBC.
“January and February are slow anyway for housing activity. Easter is the usual start of housing period.”
Up to 2000 the banks were self funding, which means they only lent out money they had on their books.
That changed with the arrival of wholesale funding, including securitisation, and this reached £650bn in lending by 2007.
When poor or subprime homeowners in the US started defaulting on their mortgages, this meant that the bonds which were linked to these home loans were worth almost nothing.
Thus the birth of the credit crunch and the looming recession worldwide.
The BBC has learned that neither the banks nor the government are aiming for a return to the levels of lending seen in 2007 – described by a senior banker as “heady” – nor do they want to see a return to banks relying solely on the money they get in from savers. That would lead to a collapse in house prices.
This mortgage guarantee plan is distinct from the £50bn Special Liquidity Scheme offered by the Bank of England, which allows banks to swap toxic bonds for high quality Treasury bonds on a short-term basis.
Mortgage Lenders May Have to Pay You Interest?
The fall in the last round of interest rates, and its knock-on effect on mortgage rates, has raised the intriguing possibility that some lenders may soon have to start paying interest to some of their mortgage customers.
These are the ones who, in the course of 2007 and even into last year, took out tracker deals that specified the interest rate would be at a level below the Bank of England’s base rate.
These were sold as loss leaders at a time when lenders were still throwing money around to attract new customers.
“The deals were incredibly popular; people snapped them up, they could see they were a good deal,” says Andrew Montlake of mortgage brokers Cobalt Capital.
In July 2007, just before the credit crunch kicked in, there were 83 such deals on offer from 33 different lenders.
Some were set at just 0.01% below bank rate, many were at 0.25% below, but others were a lot more generous.
The Abbey had a deal tracking 1% below bank rate, while the Cheltenham & Gloucester, part of Lloyds TSB, had one mortgage offer at 1.01% below bank rate.
With the possibility that the bank rate may soon fall to 1%, or even lower, some people who took out these deals may think their interest rate could soon turn negative.
And that would mean a monthly refund on their interest payments.
The situation is not clear cut though.
Paul Broadhead of the Building Societies Association (BSA) says it might all depend on what the mortgage contract says.
“It is a possibility, but it depends on the terms and conditions,” he says.
“Some deals have conditions that set an absolute floor below which the interest rate will not fall.
“But the likelihood of repayments happening in a great number of cases is low as many such deals lasted for only a short period of time,” he points out.
Typically, these tracker deals were sold with the discount to the bank rate lasting for just two years, and in a few cases three years.
So some of these deals may be expiring in the next few months anyway.
Even so, not all deals ruled out interest rate refunds.
“Very few had a floor written in – not many stipulated there was one at all,” says Andrew Montlake.
And he says lenders are keeping their heads down on the subject.
“I have spoken to a few lenders about this and none are saying what they will do.”
One, the Cheltenham & Gloucester, has in fact said it will not make any refunds because the wording of its contracts is all about the customers paying the lender, not the other way around.
Bernard Clarke at the Council of Mortgage Lenders (CML) is sympathetic to that view.
“What has been said by some lenders is that there is nothing in the contracts about interest ever being repaid to customers,” he says.
“It seems ridiculous that someone should be paid for taking out a loan,” he adds.
But what if the contract is silent on the possibility of the bank rate falling so low that interest repayments are triggered to the borrower?
If the paperwork says the interest payments will track below bank rate, customers are likely to feel that is what it should do, even if bank rate falls to 0%.
The regulator, the Financial Services Authority (FSA), has been pondering this, but so far has not decided on a definite policy as no lenders or borrowers have yet reached this intriguing position.
“Mortgage floors can be legitimate but the key is what does the contract say, and how clearly and unambiguously is that disclosed to the customer?” says a spokesman.
“The issue will have to be thought through by the lending institutions.”
Ray Boulger of mortgage brokers John Charcol is sceptical that many lenders will be able to rely on their paperwork to fend off customers.
“Many have a clause in the small print but I don’t think that they will stand up if they were not shown in the key facts when the mortgage was arranged,” he argues.
It Getting Ever More Tougher to Find The Right Mortgage Deal
Mortgage lenders are continuing to demand bigger deposits as they ration home loans to their customers.
In the past month the percentage of new mortgage deals requiring at least a 25% deposit has risen, from 54% to 60%.
And 25% of all deals on offer in fact require a 40% deposit, according to the information service Moneyfacts.
The Bank of England announced last week that banks and building societies expect to rein in their lending even more in the coming months.
“The number of deals available for those with a deposit of 25% or more continues to increase as the lenders are looking to cherry pick the best customers, said Michelle Slade of Moneyfacts.
“Worries over falling house prices and the potential of customers getting into negative equity has caused the number of deals for customers with just a 10% deposit or less to fall to an all-time low.”
Larger Premiums
There are now just 21 mortgages available with a deposit of 5% or less, compared with the position at the beginning of last February when there were more than 1,200 on offer.
The credit crunch and subsequent shortage of mortgage funds has produced a similar collapse in the number of home loans where lenders ask for a 10% deposit, once the traditional down payment.
These have fallen from nearly 1,200 at the start of February 2008 to just 148 now.
At the other end of the scale, the number of deals that need a minimum 40% deposit has shot up from just 24 to 341.
Ray Boulger, of mortgage brokers John Charcol, said life had become much tougher for people who could only put down a small deposit.
“The spread between the interest rate you pay if you have a small or a big deposit has widened considerably,” he said.
“Someone with a small deposit has to pay a much bigger premium on their interest rate and they are also shut out from some of the most attractive deals, such as tracker deals,” he added.
Prices Fall
The UK property market shrivelled in an unprecedented fashion during 2008, as the dearth of mortgage funds shut off the flow of buyers and pushed down sales and prices.
Sales volumes are currently about 60% lower than a year ago while prices, according to a Halifax survey, fell by 16% in the course of last year.
And the number of new mortgages approved for house buying in November was 67% lower than a year ago, according to the Bank of England’s latest figures.
As such they suggest that sales will fall further in the coming months.
And all experts and commentators are united in their view that prices will also keep on falling for the time being, possibly lasting into 2010.
So far there is no evidence that any recent government attempts to inject fresh funds into the banking system have yet fed through to mortgage lending.
The chancellor Alistair Darling is considering a proposal put forward by Sir James Crosby, the former boss of HBOS, that the government should agree to guarantee £100bn of fresh mortgage lending by the banking industry.
But no decision on that plan is expected until the next budget.
