14 November 2007 18:06
ANOTHER DAY, another $3.4bn. That's the amount Britain's biggest bank, HSBC,
is writing off on bad mortgage loans in the United States, according to
a statement this morning. Meanwhile, the taxpayer could lose even more
- £2bn - in the Northern Rock fiasco. The Guardian
reports today that firms looking to take over the bank are demanding
that the government waives that amount in interest on Bank of England
loans as a condition of a deal.
So far banks around the world have written off more than £20bn over
problems related to the sub-prime fiasco. But that could be only a
fraction of the real total. The joint economic committee
of the US congress estimated last month that Americans will lose more than $100bn of housing
wealth. The crisis has also cut a swathe through the balance sheets of
US housebuilders and mortgage lenders. So far though, house prces have
only fallen 3.2% since the peak in the second quarter of 2006. If house
prices fall by 10% the committee forecasts an economic loss of $2.3
trillion.
But what about the other side of the balance sheet? The congressional committee forecast that the crisis will lead
to at least two million foreclosures (repossessions) between 2007 and
2009. Proportionately, that’s double the rate seen in the UK in the
worst three years of the early 1990s recession. Things are nothing like as bad here but mortgage lenders are still predicting a 50% increase in repossessions next year to 45,000 - a level last seen in the mid 1990s.
What happens then? Repossessing homes with outstanding equity is one
way for the banks in general and the new owners of Northern Rock in
particular start to try to recoup their losses. If (when?) that happens
who should pay the price?
Hard-pressed home owners will rightly complain that billions of
pounds in loans propped up Northern Rock while savers got an
unprecedented government guarantee. So may local authorities coping
with the costs of increased homelessness.
Leading politicians in America are already calling for changes in
the law on mortgage sales and increased government funding for affected
families - go here
for an example. Just like the sub-prime crisis itself, that debate will
happen first over there and then here. The government's failure to
restore Conservative cuts in income support for mortgage interest will
be high on the agenda when it does.
Posted by Jules Birch, Nov 14
Posted in International, Mortgages, Repossessions