UK house prices have dipped for the third month in a row and a recent report has revealed that the slowdown is even being felt in the most expensive parts of London. And for those house buyers UK, things are not looking much better across the Atlantic where arguably the whole crisis started.

A cataclysmic event in the US housing market, sparked by a series of bad mortgage loans to people who could never realistically make the payments, caused the recent worldwide recession as the debts were packaged up by the City dealers and sold as prime investment vehicles.

And now comes news that new home sales in the US in the month of August has been one of the worst on record since way back in 1963.

America may just be staving off the dreaded double dip itself, but record levels of unemployment, tight credit and low house prices in general, means that there is little money around to buy new homes. Figures released by the US Department of commerce showed that the seasonally adjusted annual sales was 288,000 – static on July 2010. What’s more worrying to experts though, is that had the figures not been adjusted upwards (to take into account the season), then they would have been the worst on record.

The August figure was off the pace by some 29% compared with August 2009, aptly showing the degree of downturn experienced in the US housing market.

And these figures come after a boost from central government which between January and April 2010, introduced tax credits to help things along. It helped, but when the scheme stopped in April, things turned worse again.

On a slightly brighter note, the number of new homes being built is up 29% from April 2009, although this is nearly 75% off the record seen in January, 2006.

So it’s likely that house buyers UK will have to feel the pain for that bit longer over the coming months.

Guest Article by Neil Camp 

The Financial Services Authority has slapped the wrist of the Goldman dealers because they failed to disclose that they were under investigation for alledged fraud by the US regulatory authorities. It all harks back to the infamous mortgage investments which were basically dodgy bets dressed up to look like A grade opportunities. For many observers, this was the straw that broke the Camel’s back and sent most of the globe into a massive recession which kicked-off in 2008.

The fine is just a fraction of the $550 levied by the US authorities – the Securities and Exchange Commission – but is concerned more about disclosure, than any wrong doing that might be discovered, including the alledged fraud.

Goldman Sachs should have come clean say the UK about the charges in the US. The mortgage investments in question were complex mechanisms designed to put the best possible light on a worrying housing crisis in the US. Many of the investments were sold just prior to the US housing market suffering a major rupture and becoming completely unstuck within months.

The problem arose because the mortgage borrowing market was being ‘alledgedly’ rigged, effectively allowing anyone to gain a mortgage. Previous safeguards such as credit checks went out of the window. Unlike the UK, householders in the US can just hand back the keys and walk away from the borrowing commitment, meaning that the whole situation was being built on a fragile and weak base. Catastrophe seemed the only likely result.

The FSA fine is one of the largest ever imposed by the authority. They were annoyed particular that a trader under investigation in the US who was said to behind the allegedly ‘dodgy’ mortgage derivatives, had been moved to London and therefore came under the auspices of the UK authorities.

Goldman Sachs has kept mum about both fines and has always maintained that it has not done anything wrong legally. The US case centres on the fact that a Goldman Sachs client had major input into a mortgage portfolio which was then sold to clients. What the Bank did not do was then admit that its client – a major hedge fund – had then bet that the value of the securities (which they had helped choose), would fall. The mortgage vehicle known as Abacus went onto lose around £1 billion when the US housing market suffered its inevitable collapse.

The huge US fine did not see any admission of legal wrong-doing from Goldman Sachs, who instead claimed that the marketing material for the Abacus fund had been incomplete.

Many experts feel that Goldman Sachs were given not so much a get out of jail free card, but nonetheless should have been more aggressively prosecuted for fraud. They say that the fines should be seen against a backdrop of profits which saw the Bank book a staggering $3.5 billion gain in the first three months of 2010. And although profits dropped to just over $600 million for the next three months, no-one can say that Goldman Sachs is near the bread line.

One thing is for sure, the US mortgage debacle is likely to haunt Goldman Sachs – and indeed Wall Street and the City of London – for many decades to come.

Guest Article by Neil Camp

It was in March 2009 that the rates first dropped to their lowest point ever, but news of the latest interest rates have coincided with calls that they must now be increased in order to curb inflation.

The Monetary Policy Committee’s decision this month to leave rates where they were surprised no-one in the City.

But the clouds on the horizon include the CPI inflation figure for July which was 3.1%; way above the 2% target set by the Bank of England.

Furthermore, for the third month in a row, the minutes of the last Monetary Policy Committee meeting revealed that one member, Andrew Sentance, had voted again for a rate rise.

And there was good news for fans of the Bank of England’s quantitative easing scheme which has so far seen some £200 billion committed to its ideals. The Bank confirmed that they were continuing with QE and that it may well be further expanded.

Graeme Leach, chief economist at the Institute of Directors, said:
“The Bank of England has held fire for another month, but we think the quantitative easing gun is about to be reloaded and the order to shoot given. Whilst above target inflation has stopped the MPC pulling the trigger on a further extension in QE this month, the economic threat from weak money supply growth looms ever larger.”

Other independent forecasts, including the National Institute of Economic and Social Research, have confidently stated that the Bank of England will keep interest rates at the current record low until the middle of next year, but if inflation becomes an issue, this may well look optimistic.

And as another negative, observers point to a sluggish UK rate of growth, with a not unreasonable 1.2% in the second quarter is expected to be eclipsed by a worse figure in the third quarter, giving rise to fears of a double-dip recession.

The CBI spokesman, Lai Wah Co, came out with the following view:
“In recent weeks there has been more talk about the need to expand monetary policy, amid concerns about how quickly growth momentum will fade in the coming quarters at home and abroad. However, economic indicators still suggest the UK recovery is on track, although we expect it to be bumpy and slow.”

And the British Chambers of Commerce applauded the fact that the latest interest rates remain unchanged. Their chief economist, David Kern, said:
“The government’s tough deficit-reduction measures, although necessary to repair the public finances, will increase the threat of an economic setback. Since sustaining the recovery must remain the priority, it is absolutely vital that the MPC maintains the current low level of interest rates until the middle of 2011 at the earliest.”

Guest Article by Neil Camp

Its mortgage business aside, Northern Rock has been a major player in the children’s savings bond market and the launch of Issue 1 of the Little Rock Fixed Rate Bond, which was originally launched in early August, was a great success.

Northern Rock are keen to point out that Issue 2 of the Little Rock Fixed rate Bond is a three-year investment vehicle and offers a highly competitive rate of interest for only a one pound minimum deposit.

Anyone under the age of 16 can open an account, accompanied by the name of an adult acting as account trustee. Those holding an account are known as ‘Little Rockers’.

Those wishing to open an account can do so from a branch of Northern Rock, or via a postal application. A choice of free gifts are also available for those opening a new account.

Cash, cheque, or transfer can be used to open an account and no more than £20,000 can be paid in. Withdrawals are not permitted before 1 October, 2013, the time when the account reaches maturity. Northern Rock reminds its customers that the account is a limited issue which can be withdrawn from new entrants at any time. Also, the account is non-redeemable.

Interest is paid annually on 31 August and is offered at 4% gross per annum.

Given its recent difficulties and track record in the mortgage business of the original Northern Rock, it’s no surprise that the institution is at pains to highlight its new openness.

The announcement accompanying news of the Issue 2 of the Little Rock Fixed Rate Bond comes with the declaration:
“In keeping with Northern Rock’s commitment to providing openness, transparency, and fair treatment of customers, full product details for Northern Rock accounts are available on application in the Terms and Conditions.”

Guest Article by Neil Camp

The huge investment bank raised concerns over the way it marketed the mortgage deals to investors at a time when the US housing market was about to enter stormy waters.

Levying the fine, said to be the biggest smack on the wrist for a bank in history, was the Securities and Exchange Commission which acts as the US finance watchdog.  The case centred on allegations that Goldman Sachs did not reveal key information when one of its clients, a firm named Paulson & Co and a major hedge fund, was party to choosing which securities were placed within a mortgage portfolio called Abacus, which was then marketed and sold to investors throughout 2007. The key information was that Paulson & Co had at the same time ‘bet’ that the value of the mortgage securities would fall.

And the securities did fall, losing the Abacus mortgage fund some $1 billion in the US housing market collapse. The $1 billion was paid to Paulson & Co, which had effectively stood on both sides of the deal as a ‘short’ investor; a fact not relayed to the investors in Abacus.

Some of the big losers in the deal will get some compensation. The Royal Bank of Scotland, which took a $840 million hit, will receive $100 million, still a huge loss, and the German bank IKB Deutsche Industriebank will get back $150 million, recouping nearly all their losses.

The US Treasury gets around $300 million of the fine proceeds when the deal is finally approved by a federal judge.

But although Goldman Sachs received the record fine, industry experts say that the investment bank got off lightly. Such is the level of the bank’s profits, that the fine would be effectively recouped in a matter of weeks. Also the Goldman Sachs share price rose nearly 5% on the news, meaning that they got a nearly one billion dollar boost to their market capitalisation.

This is unlikely to be the last chapter in the Goldman Sachs mortgage deals saga.

Guest Article by Neil Camp

It said that at the peak of the market, over 30% of all mortgages taken out were interest only.

And what worries the Financial Services Association, is that many people taking out interest only mortgages do not have a suitable financial vehicle to pay them off once they are due. A large number of people rely on house inflation, or other plans (such as a windfall, or hoped for inheritance) to see them through at the end of the mortgage term.

These findings were part of a larger report which made a number of observations. Most worryingly was that nearly half of all households with a mortgage had either no money left, or indeed had a shortfall, every month after the payment of the mortgage and living costs.

This has encouraged the Financial Services Association to enforce lenders to ensure that people can actually afford the mortgage they are thinking of signing-up, has signalled the virtual ending of the self-cert mortgage (where people verify their own income) and told financial institutions to be more aware of possible problems with their borrowers should they start falling behind on payments. It stated that those borrowers with a damaged credit history were very vulnerable.

As for arrears charges for those that fall behind on their mortgage payments, the Financial Services Association conducted a review, as part of their report, and discovered that there was a wide variation in penalty fees across the market.

The Financial Services Association reminded lenders that mortgage rules exist which state that arrears charges should be based on reasonable costs incurred by the lender as a result of their customers being behind, rather than linked to punishing penalty charges. In other words, the charges should mainly cover the administrative cost of being in arrears.

The Financial Services Association is asking the mortgage industry and consumers for further views on interest only mortgages and the state of the industry in general. Responses should be completed by 16 November, 2010.

Guest Article by Neil Camp

The Financial Services Authority has said that it intends to ensure that all borrowers can afford to pay back a new mortgage.

In its new super role as consumer protector and day-to-day supervisor of the financial services sector, the Financial Services Authority is overseeing mortgage companies to make sure that responsible lending is once again the order of the day.

Observers see this as a direct attack on self certification mortgages which helped fuel the economic downturn. Many people taking out new mortgages were effectively encouraged to borrow too much by being able to quantify their own earnings. This resulted in inevitable abuse as borrowers were over generous in assessing their own income levels and some actually fabricated their own figures to gain a mortgage.

The Financial Services Authority, FSA director responsible for the mortgage market, Lesley Titcomb, said:
“There is a clear link between financial overstretch and mortgage arrears and repossessions, and we are determined to protect vulnerable consumers by making sure that everyone who takes on a mortgage can afford to pay it back.

“While it is clear the mortgage market has worked well for many, we need to build a strong new framework to protect mortgage customers and to ensure that the problems we have seen in the past do not happen again, particularly as the mortgage market recovers.”

The Financial Services Authority main proposals are:

• imposition of affordability tests for all mortgages;
• enforce lenders to be ultimately responsible for assessing a customer’s ability to pay;
• insist on verifying the income of the borrower on every mortgage application, which will prevent self-certification abuse and reduce opportunities for fraud;
• create increased protection for customers who are vulnerable and suffering from poor credit histories.

Industry experts say that the Financial Services Authority is a little behind the times, as most lenders have either voluntarily tightened their lending rules, or have been forced into doing so because of the new economic realities.

The age of the self-certification mortgage is over.

Guest Article by Neil Camp

This applies to holders of standard variable rate mortgages and according to Lloyds, there has never been a better time for most people to repay more on their mortgage than planned. This is of course because of the current historic low mortgage rates.

The new scheme will last until 31 March, 2011, and say Lloyds, as many customers as possible should take advantage. This is because of the low rate environment, which means that affordability has improved significantly. Lloyds make the point that mortgage payments (capital and interest) accounted for 32% of average post earnings in 2009 quarter four. But in quarter four 2007, they accounted for almost half, 47%. And when you do the maths, this means that the amount of money customers have remaining after tax has increased by 15 percentage points since quarter four 2007 across a range of mortgages.

And Lloyds have backed up their opinions with independent research, showing some 25% of mortgage consumers questioned on the matter in a recent survey, were already choosing to pay more off their mortgage. And of those choosing to do so, around half said that they were overpaying their mortgage to reduce its length. Furthermore, under a quarter said they were overpaying to pay less interest.

Stephen Noakes, the commercial director of mortgages for the Lloyds Banking Group said:
“With mortgage rates at an historic low, there has never been a better time for the majority of people to overpay their mortgage. The average mortgage repayment has dropped by around £188 per month. And those on tracker mortgages have done even better – on average they are just over £400 a month better off. Customers have a choice to make to gain maximum advantage from the extra cash in their pocket.

“We are seeing our customers behaving very rationally. A number of whom are not necessarily banking the reduction in their interest payments but are actually using that to pay down their interest. This is a very positive move. Not only can it help customers shave interest off their mortgage, it also means less of a payment shock should interest rates begin to move back up.”

Lloyds also provided some figures to support their argument and their new scheme. They said that on a £100,000 mortgage with an SVR of 3.5%, overpaying by just £50 per month will reduce the term of a mortgage by three years and six months. It will also save a customer £14,576.04 (£7,557.24 in interest and £7,018.80 in mortgage payments).

So if you’ve got some spare cash, you know what to do.

Guest Article by Neil Camp

A mortgage is a financial product just like any other and they are very susceptible to not only consumer market forces, but also the financial markets. Indeed, they could be seen as a fluctuating financial product that just because maybe they are based on a long term deal, does not mean that they are dormant.

The mortgage market itself is in a constant state of flux as lenders adjust their prices to keep abreast of external financial forces, including interest rate changes, and also to adapt to consumer trends and needs.

It is also a sophisticated market and one which requires a degree of research and care, so as to get the best deal. And with a mortgage switch leading to potentially hundreds of pounds less in payments – especially acted upon when good rates are around – it’s always best to do your homework and if you feel in any way intimidated, get professional advice.

And for people with certain types of mortgages – mostly those with a ‘suppressed’ payment element which have a limited time to run, which then revert back to another rate – the exercise of switching mortgages is more a necessity, rather than a luxury if they want to avoid higher repayments. Thus, standard rate mortgages, known as SVRs, tend to have higher payments, than the incentives types which are known as tracker mortgages, fixed-rate mortgages and variable rate mortgages.

And competitively priced mortgages are used as short-term marketing tools in order to get people signed-up. And once that period ends, often in two years, the rate reverts to the rates offered by the SVRS and this then is the most common time to switch a mortgage. Of course, when taking out a special mortgage deal, it is extremely difficult for the consumer to try and guess where the mortgage market will be once their special price has finished.

The worry in the current recessionary times for many people is that they were on such good deals offered at a time when the market was extremely competitive, but they will be forced into re-mortgaging when the market is in the doldrums and many lenders do not want, or cannot afford, to write new business at low rates. Therefore, for those people, switching mortgages is imperative.

If you’re asking yourself, which mortgage should I switch to, then it all comes down to personal circumstances; it is not a matter of one size fits all. It can be a fast and simple process, but it does require some paperwork. Always bear in mind that the cheapest looking deal is not necessarily the right one for you.

It may be that you fancy a repayment mortgage, because the idea of paying off the mortgage capital and lump sum together appeals to you. It may be that an interest only mortgage, which does not repay the capital, with some other financial vehicle should be in place to do so, might also be appealing. Such things as security and flexibility also play their part.

In practice, most mortgages are switched to a limited number of mortgage types. When you switch to a fixed rate mortgage, it means that, for an agreed period, you will be paying, as the name suggests, a fixed amount of money. On the other end of the scale, a tracker mortgage moves up and down tracking an agreed base rate, so can be a little bit of a gamble, but can, if taken out at the right time, save thousands of pounds. The other two products that people often switch to are discounted rate mortgages (an agreed discounted rate for a certain period of time) and variable rate mortgages (rate moves up and down in line with the rate dictated by the lender).

The actual cost of transferring is of course a consideration, but if completed properly, then these are usually outweighed considerably by the savings of the cheaper mortgage. But expect to pay such things as legal, product, arrangement and valuation fees. Also, some borrowers may charge for a switch, or moving out of a mortgage early. As always, read the small print if you want to avoid heavy penalties.

The simple message is, if you have a mortgage, consider swapping it, as you could save yourself a fortune.

Guest Article by Neil Camp

Their just published mortgage market review discussion paper is an attempt to make a better market for consumers and one that is more sustainable for the participants.

And the active involvement of the FSA in the mortgage markets reflects a changed approach for the regulator, one that is based on a more intrusive and interventionist style of control.

The key features of the review are as follows:

• introduction of affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer’s ability to pay;
• ‘self-cert’ mortgages to be banned, meaning that a verification of income is required;
• removal of products that contain certain ‘toxic combinations’ of characteristics which put borrowers at risk;
• abolition of arrears charges when a borrower is already repaying and making sure that firms do not profit from people in arrears;
• mandatory that all mortgage advisers be personally accountable to FSA;
• wish to see FSA’s brief to cover buy-to-let and all lending secured on a home.

Jon Pain, FSA managing director of supervision, said:

“The mortgage market has seen extraordinary upheaval over the last 18 months and whilst it has worked well for the vast majority of borrowers, some have suffered great financial distress. We recognise that we need to bring about a step change in regulation and we need to act now to address the issues we have identified.

“The paper sets out the main findings of the FSA’s comprehensive analysis of the mortgage market. It clearly shows a rapid explosion in mortgage products; the emergence of high risk lending strategies which typically focused on higher risk borrowers; relaxed credit standards; and a mutual assumption by too many borrowers and lenders that the good times could not end.

“The FSA needs to ensure that firms only lend to people who can afford to pay the money back. The reforms that we have announced today will ensure that the mortgage market works better for consumers and that it is sustainable for firms.”

The review has also identified that the irresponsible lending practices seen in the market until recently will be curtailed by the FSA’s existing work on capital and liquidity.

The FSA make the point in their announcement that the proposals are aimed at tackling the current perceived problems with the mortgage market. And the regulator stresses that it has not ruled out further change if the initial proposals do not have sufficient effect, including caps on loan-to-value, loan-to-income or debt-to-income.
The FSA paper will be out for discussion until 30 January, 2010, during which time it will actively seek views from the mortgage industry, consumers and consumer groups. A further statement, outlining intended courses of action, will be issued in March 2010.

Guest Article by Neil Camp