Do they lend with intent to take it all back?

Sunday, October 7th, 2007

UK sub-prime mortgage lenders who specialise in these mortgages or offer them as part of their business disproportionately make up over 70% of all repossession cases, according to a BBC survey of more than 7,000 court hearings over the past three months carried out jointly by the TV programme Panorama and radio show Five Live Report.

In the US sub-prime loans account for less foreclosures overall–55%. Foreclosures are the equivalent of repossession hearings.

The BBC found cases of council tenants on benefits being encouraged to significantly exaggerate their incomes in order to buy their houses under the right-to-buy scheme, and some of these unfortunates now face having their homes repossessed. In other cases families were given mortgages which became unaffordable within months.

Many people, myself included, have long held to the belief that sub-prime mortgages are not the only legally criminal activity being undertaken by moneylenders. Daytime TV ads aimed at people in huge debt, offering them consolidation loans bundling all their debts together into ‘one affordable monthly payment’ do so in the expectation of eventually being able to reap a huge dividend, a painful one for the borrowers, that involves them snatching the homes on which the loans are secured. Say a person’s overall debt comes to £30,000. Their home is worth £150,000. They get rid of all the individual debts and take out one loan, paying them all off but now having one large monthly payment. They get to a point where they can’t afford that any more than they could afford to keep up payments on the individual debts and so the debt consolidation company calls in the bailiffs and takes the house.

For a loan of £30,000, in this one example, the company makes £150,000… No. Wrong. The point is, in most cases to date, the lender makes more than the original value of the house at point of selling it on. With house prices escalating in recent years at a very fast rate, though the rate of increase has been slowing down over the past year or so, the lender is actually able to make considerably more by putting the house up for sale. It sells for more than the £150,000 it was valued at when the sub-prime mortgage or consolidation loan was taken out. Plus, the fact that it is vacant and there is no chain makes it more attractive to buyers.

The debtor, of course, along with partner and children, is by that point homeless or likely living with family or friends.

These companies work on the basis that this scenario is more likely to happen than not. They don’t give a damn. They hope for suffering, because in that pain there is huge profit to be made.

Putting aside the immorality of this brutally irresponsible lending for a moment, the whole dirty deal falls apart when the houses that are repossessed either don’t sell or can only be sold for much less than expected, as and when market conditions become less favourable for sellers. This is starting to happen in the UK. It’s definitely a buyer’s market for the first time in over ten years. Those of us hunting for new homes can smell it in the air. Wise sellers are reducing the asking price on their properties as much as they are able in order to sell and move on to where they need or want to go.

Fools—and there are many—stick with a high price, wanting in on the greedy gravy train, and say they’re prepared to wait months even years to sell their property. But they are gambling everything while ignoring the signs that we are in a downturn. Their property loses value day by day even while they stubbornly stick to the price they want to sell at rather than a price people will pay.

Whoever is left holding the debt in what the BBC appropriately terms a ‘game of pass-the-parcel’ could suddenly find it to be worthless or not worth enough to cover the original pay-out, whether that was a consolidation loan or a sub-prime mortgage. Even if the original pay-out is covered, the debt was probably sold several times over in the City and so the less money made, the more businesses are involved that don’t get the dividend they were counting on.

I don’t feel sorry for the lenders. I feel sorry for the victims, and eventually we will all face harder times because of these repossessions. The problem becomes shared by everyone eventually because if we’re heading down the same road as the US financial markets then the entire UK economy will nose-dive as a consequence of what I can only describe as evil and greedy opportunism.

We need affordable homes for everyone. In the very long-term we might just see that notion realised, but before it happens the country will face many thousands of families being thrown out on the street. And we no longer have the social housing for them that we had after the Second World War because the council houses have either been sold off en masse to private housing authorities or to the occupants without new housing stock being built and maintained by the local authorities. These familes won’t find shelter in the private rental sector because they will fail the near-universal credit checks now employed whether you’re aiming to buy or rent. They will literally have nowhere to go unless family and friends can take them in.

Add to this the phenomenon of the townhouse—cheap to build, expensive to buy, growing all across the country like opportunistic weeds taking advantage of the demand for new homes. These thin-walled sheds with foundations built on landfill and formerly (we hope formerly) toxic dumps masquerade as three- or four-bedroom properties but in reality have rooms that are usually no more than five feet wide and four feet long. You have trouble fitting single beds in them, let alone double- or king-size. If you want a wardrobe you have to use one of the other ‘bedrooms’ for that, if you can. They sell because they are expertly marketed and because people need homes and because lenders will lend to just about anyone these days. The government actively encourages this type of property being built, and our greenfield sites—home to rare wildlife and offering respite from urban sprawl—are under increasing threat of being destroyed to make way for more of these crappy pseudo-homes being built.

We are told it is necessary to change the law to remove the protection that areas of outstanding natural beauty have enjoyed for centuries. Yet for any creature to live happily it must have space. Put a bird in too small a cage, it becomes depressed. So it is with people.

We have known for a very long time that high-rise living in the UK ever since the explosion of ugly towers in the 1960s has led to depression, suicide, crime, the breakdown of families. And so we no longer build upwards. But those high-rise flats, as opposed to million-pound city penthouses, were always small and dingy. It’s the small and dingy that was always the problem more than the height of the buildings.

You don’t need to be building towards the sky to build small and dingy. Townhouses are too small and, within a few years after building them, will have lost the alluring shine of the new and be seen as being as dingy as the high-rise blocks they have taken over from as the choice of government planners.

Build better homes. Make them affordable. Protect people from repossession by introducing new mechanisms to allow them to make some kind of repayment on their properties during difficult times, and increase those payments when times get better. Only evict those who will not pay anything at all. Leave our green spaces alone. Build upwards if you have to, but make sure whatever you build is big enough to move around in and nurture families.

Anything else is, as becomes increasingly obvious, madness. We all need protection from it. Unfortunately, it may already be too late for many people.

categories: in the news