Toxic loans that threaten us all
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.