The dispute as to whether the UK adverse market will become a carbon copy of the current US crisis is now as old as Methuselah. But I’m still gnashing my teeth about the doom and gloom preachers that have flooded our trade press in recent weeks. In my opinion, predicting a non-conforming crash in the UK is simply unjustified.
Cease the debate
We took an in-depth look at the UK mortgage market and its borrowers, specifically at the type and the value of their adverse credit histories. Our findings significantly contradict speculation that adverse borrowers are set to experience similar problems to those of their US counterparts. The biggest problem in the US is a relaxation of lending criteria to the detriment of credit quality, and it was said to also potentially be a hitch for us. But in the US adverse market, loan-to-value (LTV) levels are often close to 100 per cent and in some cases even higher than that. As a consequence, many properties have dropped into negative equity. This ultimately meant that borrowers were unable to remortgage away from a variable rates to fixed rates, an option which, in a rising interest rate environment, could be highly desired.
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But I can not see a scenario of this sort occurring over here, and I have the facts to prove it. We have drawn statistics from a random sample of over 6,000 decisions worth over £1.3 billion, which were submitted to us in the period from September 2006 to date. From these statistics we discovered some interesting facts, not least that the average adverse LTV is 76.7 per cent. Not only is this way below the US ratios, it is also significantly lower than the UK market average.
Unjustified
According to the Council of Mortgage Lenders’ data, the average LTV for house purchase in 2006 was 80 per cent, and for first-time buyers, 90 per cent. The data for Q1 2007 is broadly similar, and therefore the prophecies of doom warning of an adverse market meltdown are simply unjustified. The UK’s mortgage lenders are neither loosening criteria copiously nor relaxing their credit quality. Also, interest rates have not risen as sharply in the UK as they have in the US; therefore those households on variable rate mortgages are better equipped to meet the increased monthly commitment when an introductory rate expires. Plus, by having enough equity in their properties, they can always switch to fixed rates.
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Market economics here simply don’t compare to those in America, their underlying supply and demand imbalance is the exact opposite of ours. In the US, housing supply outweighs demand, and this is causing a house price depreciation forecast of 8 per cent. By contrast, forecasts over here in the UK predict that house prices will increase by up to 8 per cent in 2007 alone. With the demand for property continuing to outstrip supply, is it very unlikely that UK house prices will fall. Our imbalance is actually creating a whole different kind of problem. In high demand areas like in the South of England, households have to rely on temporary accommodation, and those on modest incomes are increasingly being excluded from the owner occupied housing market. In areas of low demand – which is often a symptom of wider economic and social difficulties – one will find significant numbers of very low value houses, combined with stock in poor condition and widespread abandonment. The industry should rather concentrate on debating our own housing issues than those of the US.
Not in extreme debt
Apart from revealing low adverse LTV levels, our research uncovered other interesting facts about the profile of people looking for adverse mortgages. These individuals have most likely experienced credit difficulties in the past and as such have a record of loan defaults, mortgage arrears, CCJs, Individual Voluntary Agreements or bankruptcy.
Our research found that just over half of adverse applicants have non-mortgage defaults registered against them, four out of 10 have a record of mortgage arrears, and a smaller number – less than three in 10 – have had CCJs. So the vast majority of these people are not in extreme debt.
It is well known that the UK’s processes in the adverse market are very robust. By having in place sophisticated affordability calculation systems, lenders are perfectly able to assess borrowers’ credit situation and wouldn’t allow them to overstretch themselves. The significantly lower LTV ratios of adverse borrowers also mean that they have enough equity in their homes should they need to remortgage to a fixed rate or any other. All in all, the adverse sector in the UK is adequately robust, and there is no reason to panic.
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