Toxic loans that threaten us all

The Daily Telegraph - Property - - Cover Story - Ed­mund Con­way

Re­mem­ber those big tubs of Neapoli­tan ice cream — the ones with the three fat slices of choco­late, vanilla and straw­berry flavours? Well, be­lieve it or not, those tubs can tell us a great deal about the hous­ing mar­ket.

Cast your me­mory back to the turn of the mil­len­nium. Prices were ac­cel­er­at­ing in the early days of the prop­erty boom. Buy-to-let loans, in­tro­duced only four years pre­vi­ously, were in­creas­ingly pop­u­lar. The mort­gage mar­ket in Bri­tain was not un­like that ice cream tub. When Bri­tons chose their mort­gages, they usu­ally se­lected one of three flavours — bank mort­gages, build­ing so­ci­ety mort­gages or spe­cial­ist mort­gages.

The first two were the vanilla and choco­late of the mort­gage world: de­pend­able, solid favourites. Spe­cial­ist mort­gages were straw­berry: fruity and un­pre­dictable. They are, more specif­i­cally, the mort­gages taken out by those who can’t get a loan from reg­u­lar lenders: those with poor credit rat­ings, the self-em­ployed and buy-to­let in­vestors, for ex­am­ple.

Here’s the in­trigu­ing thing: in 2000 this spe­cialised lend­ing ac­counted for a third of new mort­gages. Since then it has rock­eted to al­most two thirds. The banks and build­ing so­ci­eties with which many of us have our mort­gages now ac­count for only a third of new home loans. Some might say that’s noth­ing to worry about. Af­ter all, much of this must be down to the in­creased pop­u­lar­ity of buyto-let. But buy-to-let isn’t the only in­gre­di­ent within the spe­cial­ist flavour; for ex­am­ple, a size­able chunk is taken up by those lend­ing to peo­ple with poor credit rat­ings, who are likely to be the first bor­row­ers to de­fault if the go­ing gets tough.

Then there are com­pa­nies that con­sol­i­date all your loans into one. This debt does not van­ish; all th­ese firms usu­ally do is to plop what you owe into a new mort­gage se­cured against your home. The mort­gages lent by the spe­cial­ist sec­tor tend to be less com­pet­i­tive than those from banks and build­ing so­ci­eties. Lenders are also less likely to be for­giv­ing if their cus­tomers are late with a pay­ment.

The Fi­nan­cial Ser­vices Author­ity, which reg­u­lates mort­gages, said re­cently it was ex­tremely con­cerned about this part of the mar­ket, warn­ing that lenders might not be strin­gent enough with those who have poor credit records. My worry is that the mar­ket has be­come too re­liant on this slice, whose growth can­not go on for­ever.

If there is a down­turn, the FSA fears straw­berry may be the first flavour to suf­fer, with some over­stretched bor­row­ers de­fault­ing. This would have been less of a prob­lem a few years ago, but now that this sec­tor ac­counts for such a large chunk of over­all mort­gage lend­ing, it could send the rest of the mar­ket reel­ing too.

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