Essentially Home Loans Weblog

Sub-prime lenders are using heavy handed approaches in order to manage borrowers who are falling into arrears. This, coupled with bad advice from brokers as well as irresponsible lending decisions, is making things a lot harder for some borrowers. Many of the regulatory safety nets set up by the Financial Services Authority (FSA) are failing to protect borrowers who are vulnerable to bad debt.

The Citizens Advice (CA) are calling for a pre-action protocol to be put in place in order to ensure that court action against borrowers is used only as a last resort. The CA is also calling for the a new housing benefit for homeowners to be established to provide tenants who are on low incomes.

The Intermediary Mortgage Lenders Association (IMLA) claims that in calling for these new safety nets the CA has ignored the underlying strengths of the mortgage market in the UK.

The recommendations by the CA comes after figures were just released showing that borrowers’ ability to afford a new home have reached their lowest levels since 1992 when the UK was in the grip of a recession.

The Council for Mortgage lenders has released a report in which it claims that the proportion of first time buyers’ take home pay spent on servicing their mortgages went up to 20.6% from 20.4% by the end of last year.

If you are having trouble repaying your home loan make sure you talk to your lender and see if you can come to some sort of repayment agreement before putting yourself at risk of repossession.

The Chancellor Alistair Darling has proposed making it easier for lenders to fund 10-year fixed rate home loans. The changes proposed could mean that borrowers would then be tied for longer periods to their fixed rate deal thus helping to stabilise the market.

So far borrowers have only been able to take out these type of mortgages for periods of two or three years. This has resulted in the situation where millions of borrowers are now set to come off those deals shortly and move onto much higher interest rates, leaving many struggling to meet their monthly repayments under the burden of higher interest rates.

So far take up of ten year or more fixed rate loans has been very slow. This is despite the fact that roughly 30 lenders offer deals that last that long. Some lenders offering fixed rate deals of 10 years or more include Halifax, Britannia, Norwich & Peterborough and West Bromwich societies.

Up until now fixed rate mortgages for periods longer than 10 years have been unpopular because generally they are less competitive than their two or three year counterparts. The other problem with the 10 year fixed rate deals is that customers signing up to ten year loans can face punitive charges if they decide they want to change their deal or their lender before the period of the contract is up.

Lenders have recently been trying to make fixed rate deals more attractive by reducing charges if you decide to change deals as well as making their offers more flexible.

One of the UK’s leading charities has stated that sale-and-rent-back property schemes are a disaster waiting to happen and something needs to be done sooner rather than later.

The claims come from the Citizens Advice Bureau who have called for more official regulation of firms involved in the scheme. Currently firms are simply buying the homes of people who are at risk of repossession at a knock down price and then renting the property back to the former owner.

Citizens Advice has found that some companies are paying less than 60% the value of homes and not providing any guarantee that owners will be allowed to remain in the home after a standard 6 to 12 month rental period has expired.

Typically these schemes attract bad debtors who are in danger of defaulting on their home loans. These companies step in before the loan lender puts a repossession order on the client. However, the process frequently just ‘buys time’ before the family are forced to leave their home, usually in a worse financial position than if the bank had forcibly sold their home at the going market price.

Peter Tutton of Citizens Advice has stated on ITV1’s Tonight with Trevor McDonald that: “We’ve got people who are vulnerable trying to stay in their home being enticed into an industry that has no controls on it at all at the moment and that is a disaster waiting to happen.”

He went on to say: “Unless something is done to bring this industry into some kind of regulation to get some sort of framework of quality and assurances for people entering into these agreements, the kind of security tenure they’re going to get, what they are paying and what protection they get against things going wrong, we could see a lot more people really finding they are losing out lots of money and still losing their homes.”

New restrictions have been introduced by lenders meaning that high-risk lenders will find it increasingly difficult to secure a mortgage. Because of the changes by lenders to their lending criteria it is expected that the number of rejections for home loans are going to soar.

An independent broker has released new research showing that a quarter of all sub-prime and specialist mortgage applications that had would have been accepted last year would now be rejected.

Low income households as well as borrowers with poor credit histories are going to find it increasingly difficult to even get a bad credit loan because of the changes that have been introduced by lenders.

David Titmuss, the managing director of the company that released the figures has claimed that the potential impact upon the economy as a result of more and more people being rejected for mortgages could be far worse that many experts have admitted.

It is expected that more and more people will have to go into debt management and Individual Voluntary Arrangements (IVA) because they will no longer be able to secure and affordable mortgage. The number of home repossessions is also expected to go up which could lead to an overall fall in house prices as there simply will not be enough money to buy them.
Another financial website has found that roughly 5% of first time buyers are at a very high risk of being caught out when there is a downturn in the housing market.

The decision by the Bank of England to hold rates at 5.5%, shows clearly that it is still not fully convinced that the slowdown in the housing market has gone far enough.

Analysts are more doubtful however warning that continuing instability in the credit markets is going to force the Bank to cut the base rate very soon in order to overt a full blown crisis for borrowers of loans and mortgages.

The decision by the Bank to hold base rates was expected by most experts and it is now the third time in a row that policy makers have decided not to change rates.

While the credit crunch is creating turmoil in the financial markets the Bank of England is still looking for more concrete evidence that the housing market is continuing to slow down and that the credit crunch that has so far mostly been felt by banks is going to spread into the rest of the market. Meanwhile one in four home loan holders are said to be ‘anxious’ about the current financial situation.

According to Halifax the annual rate of house price inflation fell in the recently to 10.7% down from 11.4% the month before. Halifax is predicting that there will be even further falls in the next couple of months as the strong growth figures from early 2007 start to drop off from the annual rate of growth.

The three month figures for house price inflation give a better picture of the underlying trend in the market. Between September and December house prices grew by only 0.2% down from 0.9% from the previous three months of the year and a 2.3% increase in the second quarter of 2007.

According to a survey by Nationwide Building Society only 29% of credit card customers are aware of the fact that many credit card providers always pay off debts charged at the lowest interest rate before paying off the debts with the higher rate of interest, making themselves an additional £500 million each year from this credit card interest rip-off.  Most credit card companies use this method to reduce the balance owed on your account to suit them, not you - a sneaky way of maximising the interest that you end up paying.

Most people are too optimistic in the sense that many credit card customers trust in their credit card company too much and assume that the company has their best interest at heart, when if fact it only has interest in the amount of money they will be able to make off of their customers’ debt.

Figures from the survey reveal that 18% of people assume that the longest outstanding debt is paid off first, with another 12% believing that the items with the highest interest rate is paid off first.  What seems to be the most disturbing is that a large percentage admits to not having a clue as to how their debt is paid off; roughly 26% admit to not knowing how their debt is paid off.  However, this could all change as the Department of Trade and Industry has ruled that starting in October 2008 all credit card providers must draw attention to the order in which payments are made.  This is part of general trend towards governing bodies keeping an eye on financial services, such as personal loans, insurance, banking and other forms of consumer credit agreements.

Consumers finding themselves paying vast amounts each month from their credit card bills and yet paying little more than the minimum amount would be wisest to consider a debt consolidation loan. Customers usually find that they can continue paying the same each month in loan repayments and yet most of the sum repaid will be capital, not interest, leaving them to clear the debt in record time.

Some experts are warning that the number of repossessions will soar this year as lenders begin to crack down on sub-prime mortgages by pushing up interest rates and cutting down on how easy it is to secure a loan.

There are hundreds of thousands of homeowners with poor credit histories and it is predicted that as many as 250,000 of them are at risk of losing their home as the impact of the crisis to hit Northern Rock and the global credit crunch begin to impact on banks who are now forced to impose new restrictions on the lending criteria.

Most lenders are afraid of taking too much risk and are pushing up rates as well as refusing loans to customers who have the worst credit problems. This means that thousands of home owners could find themselves in a situation where they can no longer afford their mortgages as the fixed rate deals that they have taken out come to the end of their terms.

Currently the sub-prime sector represents roughly 9% of mortgages in the UK or 1m of the 11.7m mortgages out there. The sub-prime sector was originally a sector dominated by self-employed borrowers but it has grown rapidly over the years as lenders targeted people who would not usually qualify for a conventional loan. This has resulted in the situation we are in today leaving many sub-prime borrowers not exposed to the risks of the financial system.

There have been increasingly strong signs that the property market is heading towards a slowdown. The first shock to hit the housing market last summer was the sub-prime lending crisis that resulted in banks tightening up lending criteria and following stricter conditions on extending bad credit loans to borrowers with poor credit history. The slowdown was compounded by the crisis to hit Northern Rock in recent weeks. All this has led to a change in the way the property market is working.

The fact that there has not been a flood of sellers looking to sell their house in order to avoid financial difficulties in the coming months is a clear sign that most property owners at the moment have decided to take a ‘wait and see’ approach to the property market while uncertainty remains over what direction it will go.

There are currently signs of a slow down but not the kind of signs that would indicate that we are heading towards a crash. One business consultancy, Hometrack, which monitors house prices and issues a price index each month for England and Wales has found that while there are clear signs of a slowdown they are not catastrophic. Other firms have found similar result with their studies of the housing market such as Rightmove.

Over all house prices have shown little movement over the past month as buyers became more and more cautious and also as a result of banks tightening up of lending criteria on loans and mortgages.

One of the most influential economists in the world, Alan Greenspan, predicts that Britain’s housing market is heading for a downturn and it is not going to be pretty.

The US property market has been in a lot of trouble recently as a result of the global ‘credit crunch’ that has been afflicting financial institutions. However Greenspan claims the UK market could be hit a lot worse because there are so many more mortgages here that are adjustable-rate loans linked to interest rates.

Greenspan’s predictions came just days after the Bank of England decided to bail out Northern Rock. Northern Rock which is Britain’s fifth largest lender was sent into a crisis situation after news of the loan from the Bank of England. Customers of the bank queued up, sometimes over night, in order to withdraw their savings from the bank, and it is estimated that £2bn has been taken out since the panic began.

Greenspan also predicted that inflation could take off in the UK which may lead to the Bank of England having to raise interest rates into double figures in order to keep prices under control. This could lead to even more trouble in the property markets as well as with loan borrowers.

However it’s not all bad news as Greenspan is confident that the UK’s strong economy is in a good position to deal with any crises that does comes its way. This is because the UK has a much more flexible economy than many of our western counterparts.

There are growing fears that Britain’s housing sector could be heading for a painful slowdown as the credit crunch affecting the banking sector spills over into the wider economy.

Recent figures released by the Building Societies Association show that the value of mortgage approvals for January nose dived by 25% to £4.168bn.

These figures are the strongest signs yet that the crisis in the credit-market has started to affect the mortgage market and will only add to the stain that homeowners have been facing in recent months.

The credit-crunch as impacted on all areas of the financial sector right up to the Bank of England Governor, Mervyn King, who came under heavy criticism for his handling of the crisis to hit Northern Bank as well as the credit-crunch.

The Bank of England has announced that it is now willing to offer £10bn bail-out money for struggling banks, which is a welcome move, however many in the banking sector are angry that the Bank of England was so slow to intervene.

The problem for borrowers is that banks are also trying to recoup many of their losses from the credit crunch which is only adding to the borrowers’ woes.