What value maturing mortgages?

The crisis in Britain’s property market must surely now take centre stage as the artificial recovery based solely upon printed money is seen by the majority to be the complete illusion it always was. Back in September 2008, when it should have been obvious that some kind of cure had to be found, I posted the following posts on consecutive days, which may still be read in full from the links at the foot of each quotation.

What value maturing mortgages

A "Professor" whose name I twice missed, but one time member of the Bank of England’s Monetary Committee was doing the rounds of the 24 hour TV news channel last week stating that mortgages were worth their face value on maturity. It was clear from the interview with the clearly demented Prime Minister Gordon Brown on Friday on Sky News, that it is this mistaken view that is now driving the British nation into ever deeper bankruptcy. Let me explain. 1) If I am a supposed homeowner with a mortgage of eighty per cent of previous values I have a 20 percent share of that price. If prices fall by 10 percent I still have an equity share of 10 per cent and will therefore continue with my mortgage payments in the expectation of future house price rises and a desire not to lose that 10 per cent stake. 2) If I am a supposed homeowner with a mortgage of ninety per cent of previous values I have a 10 per cent share of that price. If prices fall by 20 per cent I have negative equity of 10 per cent and if prices are forecast to continue to fall I have zero incentive to continue the mortgage payments on a property over-valued by 10 per cent. As prices fall and re-possessions mount there will be a growing stock of unoccupied housing exposed to squatters and/or a tumbling rental market causing more foreclosures in the buy to let sector further exacerbating the problem. Hence the panic in the property industry to hide the true depth of the collapse. A mortgage maturing in 20 odd years at face value with inflation above 5 per cent is worth very little on present day values. A mortgage maturing several years in the future in a high inflation environment with no interest payments being made is on a discounted cash flow basis effectively worthless. The losses must lie with the mortgage lenders who made the loans on their assessments of present and future property prices, they can hardly now expect the borrowers to bear the full brunt of their ‘professional’ errors, if they do (as seems to be the case at present) then they are likely to be mistaken in my view. That is why the Halifax will now likely end by bringing down Lloyds TSB. Where Britain and Brown (if still in post) go from there is anybody’s guess!

Labels: Credit crunch

posted by Martin at 8:33 AM

Curing Britain’s Property Price Crash.

In my post of yesterday, immediately beneath this posting, I addressed the problem of the householder in negative equity – particularly in my example number 2, of a family with a mortgage in excess of the value of his home but not yet in default – a potential ‘walkaway mortgagee’ as separate from one in default and given notice of re-possession. In my view it is the potential ‘walkaway’ who must first be helped. A decision to quit one’s home is grave indeed and places that family in a position of effectively turning their back on the system. It is therefore an action that the government must endeavour to discourage even at great cost. (Re-possessions follow from a considered action of the mortgage holder and form a separate problem). Nobody yet knows how far UK property prices will plunge but it is essential to be aware that a fall of 20 per cent from peak levels requires a rising property market of 2 per cent above inflation for a period of twelve years before the original peak value is once again achieved. That is far too long to expect an ordinary mortgage holder to maintain mortgage payments for zero return. Once ‘walkaways’ begin they will spread like a plague with all kinds of consequences such as cross-squatting which will make counter-measures practically impossible – effectively anarchy could be an end result. Mortgages have always assumed the equity provided by the mortgagee is the first at risk. In this crisis that has to be changed. I suggest that for houses purchased since Gordon Brown, in the words of incoming BoE Governor King, to paraphrase ‘moved the Goal Posts and excluded house prices from the CPI’ any loss of value on the resale of such houses be directly proportioned between the first mortgage holder and the mortgagee. This is potentially expensive, but less so if it halts further slides in house prices. As the country is effectively bankrupt such a move will need financing and as a further step to somewhat also put the cost of the greed at the door where it lies I would further suggest the exemption of the first home from capital gains tax be withdrawn.

Labels: UK House price crash

posted by Martin at 9:29 AM

The Irish Times, this Monday, reports that its government, having rejected the idea floated for ‘debt forgiveness’ as recently reported on my blog, is now considering a separate agency to handle these matters, read here. This item makes essential reading in the UK, as it covers all the points and arguments raised for and against ‘debt forgiveness’, ‘nationalized banks’ etc., and just where the responsibility for many of the recent excesses should eventually be properly placed. All these delicate considerations should now be up for urgent discussion and consideration in the UK. The likely toppling factor of multiple ‘buy to let’ property holders with interest only loans, likely soon to face bankruptcy and portfolio liquidation, when (not if) interest rates begin to rise, was also discussed in the Irish context on Ironies Too, last week.

This is NOT a problem our Ministers can push off onto, and thereafter blame, the EU!

9 comments for “What value maturing mortgages?

  1. August 29, 2011 at 3:31 pm

    All these arguments seem to forget one issue, that families want and need somewhere to live. A house is not just an investment, a mortgage can be considered as an alternative method of renting with the mortgage lender as landlord. The main difference is that the purchaser accepts maintanance costs and responsibilities in return for freedom to decorate/renovate and to gain a residual value.
    In that context, and because rents roughly follow values, occupiers pay much the same either way and it makes little economic difference whether people pay rent or a mortgage, or whether the house has any residual value at the end of the mortgage period.
    It only becomes important if the entire system fails or prices drop to the extent that the cost of rents become very low or negligible compared to a mortgage, or if low values result in properties being abandoned and taken over by social housing in some way.

    • August 29, 2011 at 3:49 pm

      I only really part company with you when you arrive at your final paragraph which I would choose to put somewhat differently, such as:

      It only became important when home ownership and the ever increasing value of property, became both a middle class status symbol and almost the sole obsessive topic of conversation, with all the resulting distortion of tax allowances and
      interest rate policy (not to mention lifestyle choices,) that thereafter resulted

      The consequences of the long delayed and obvious failure must eventually take hold. The negative equity issue when interest rates begin to increase should have by now had a solution available, yet the hope ha

      • August 29, 2011 at 8:49 pm

        OK, won’t argue with that, Basically it’s saying the same thing looking from a different direction.
        Possibly also I have a somewhat more northern perspective than many commentators. You can buy a perfectly habitable house round Stoke on Trent for about 100K – not the size or area some might want to spend their life in perhaps, although plenty of people do and there are far worse. For anyone with an average income who can scrape up a deposit a mortgage can be cheaper than renting. I suspect rents are too high, but that they are being driven up artificially by benefit levels and deposit hurdles to buying. Remember a landlord doesn’t just rake in profit, they will pay tax on the income, probably pay a commission to an agency and have various regulatory costs, so a large slice of the rent – maybe 30% – is lost money which ultimately comes from the tennant and pushes up rents.
        It’s a very different senario to a million pound mansion in the home counties and difficult and dangerous to make simplistic judgements.

    • August 29, 2011 at 3:50 pm

      I only really part company with you when you arrive at your final paragraph, which I would choose to put somewhat differently, such as:

      It only became important when home ownership and the ever increasing value of property, became both a middle class status symbol and almost the sole obsessive topic of their conversations, with all the resulting distortion of tax allowances and interest rate policy (not to mention lifestyle choices,) that thereafter resulted

      The consequences of the long delayed and obvious failure must eventually take hold.

  2. Dave_G
    August 29, 2011 at 8:43 pm

    Am I reading this correctly?

    “If I am a supposed homeowner with a mortgage of eighty per cent of previous values I have a 20 percent share of that price. If prices fall by 10 percent I still have an equity share of 10 per cent”

    Surely if prices fall 10% you have an 18% equity share?

    • August 30, 2011 at 8:27 am

      If I recall my reasoning when first putting forward the argument some three years ago, I decided to somewhat simplify the argument so as to not to confuse what I believed was the main point to grasp.

      In the example you cite in the eighty per cent mortgage case with a ten per cent price drop, the homeowner sees his equity percentage share fall from 20% to 11.11% although he has lost half the money he put up, ie on a property worth 100 he had 20 but now only 10). Also in the cause of simplicity I ignored all the costs he would incur were he to decide to cut his losses and sell up ahead of further price falls.

      The point I was and remain trying to impress is that the homeowner carries all the burden of the losses until his equity is all eroded. The lender suffers no losses until the house sales price falls below the level of their loan.

      Such losses were partly due to the incompetence/negligence of the Labour Government and the rapacious and negligent lenders. My proposal is that the losses of homeowner’s equity be shared in proportion to the original investment at the time of the purchase, while Brown was either Chancellor or Prime Minister, involving sales of such properties for a limited period of years ahead. A Brown Levy perhaps, designed to prevent walkaways and widespread abandonment of properties and potential cross-squatting.

  3. August 29, 2011 at 11:08 pm

    I’ve long regarded house prices to be double their true worth. Their value has been inflated by easy access to debt, rather than true, actual value.

    The current value of a house is several times the cost of the materials and labour to build it, which shows the true extent of the problem.

    The debt crisis will not be over until house prices are around half of what they are now, reducing in cost either by a massive, painful slump or the government’s favoured mechanism, less painful inflation over time.

    You can imagine the length of time it would take to slowly inflate away the house price bubble. That’s an indication of the length of time this problem will exist.

  4. David
    August 31, 2011 at 5:59 pm

    “…all kinds of consequences such as cross-squatting which will make counter-measures practically impossible – effectively anarchy could be an end result…”

    Well, that’s why the Coalition is changing the law on squatting then – pre empting the collapse. Mind you, the scumbags who squat treat the properties so badly that they’ve shot themselves in the foot. I don’t mind anyone squatting in an abandoned house if they look after it and leave when someone moves in, but I have no time for the feral rats who trash properties and refuse to go when they know they’re depriving someone of their home.

    • August 31, 2011 at 6:49 pm

      What I had in mind when mentioning cross-squatting came from trying to consider how ordinary families with children might try to protect themselves against homelessness. Two families facing negative equity and possible re-possession could possibly cross-squat and deny any knowledge of their friends possibly availing themselves of their own one-time home.

      Lenders, IMO, will initially be most harsh against home-owners whose mortgages roughly equate to the newly reduced house prices, thus minimising their own losses. Those heavily in arrears or default, will probably have more leeway as the losses from evicting them and disposing of the house will more quickly and brutally expose the lenders incompetence that much sooner!

      Given the scale of the likely house price fall, now worsened by these extra years of neglect, social housing cannot possibly be expected to relieve the situation about to arrive!

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