The UK Housing Market Recovery

A lot of people down my way have been getting excited about apparent green shoots of recovery in the housing market thanks to quite a lot of favourable news items appearing suggesting increased activity at estate agents. Indeed local agents are getting very excited and lots of new properties are showing-up in their windows with somewhat optimistic price tags. This is what we in the trade call a “dead cat bounce”, where people simply can’t take any more bad news so they just stick their fingers in their ears and sing “la, la, la”. Just ask Julie Andrews what comes after “la”…

U.K. Home-Loan Delinquencies Worse Than for Subprime
 
May 20 (Bloomberg) — Delinquencies on some U.K. non- conforming home loans exceed those by subprime borrowers in the U.S., and losses on the securities they back are accelerating, according to independent research firm CreditSights Inc.
 
Almost 30 percent of non-conforming mortgages made in Britain in 2005 are 90 or more days delinquent, compared with a rate of 27 percent on U.S. subprime loans made that year, analyst David Watts wrote in a report today. Non-conforming loans are similar to subprime in that they typically have low, or no, documentation requirements and may be made to borrowers with poor credit scores.
 
“The similarity to the U.S. is already reflected in delinquency and repossession rates and we think it will be evident in eventual losses to investors,” London-based Watts said in an interview. “They have all of the hallmarks of the U.S. deals.”
 
Unemployment in Britain, which rose by 244,000 to 2.2 million in the first quarter and may reach 3.1 million by the end of next year, has coincided with “a sharp rise” in delinquencies, according to the report. Bradford & Bingley Plc, the nationalized U.K. mortgage lender, said in March provisions for bad loans soared 23-fold in 2008 and forecast “further deterioration” this year and next.
 
‘Alarming’ Delinquencies
 
There are about 30 billion pounds ($46.5 billion) of bonds outstanding that are backed by non-conforming home loans, according to the report. The rate at which delinquencies are increasing in the securities is “alarming,” Watts wrote.
 
In the past quarter, 90-plus-day delinquent mortgages in 2005 RMBS have increased by 5.25 percentage points to 29.3 percent, according to CreditSights. Delinquencies rose 5.7 percentage points to 25.1 percent for 2006 deals and by 4 percentage points to 16.3 percent for 2007.
 
House prices are declining, falling more than 22 percent since mid-2007, and exacerbating the impact of the rising unemployment rate, according to CreditSights.
 
That is feeding through to repossessions, which for the 2005 deals are about 7 percent, similar to U.S. subprime, and 5 percent for the 2006 RMBS and 3 percent for 2007, Watts wrote. Losses when those properties are sold are climbing, rising to an average of more than 25 percent since house prices peaked in 2007.
 
“Losses are high and going higher,” said Watts. “The numbers are ugly, uglier than I expected.”

These are what are sometimes called “liar loans” and while not exactly sub-prime they are equally as corrosive. We are just entering the 18 month zone where people who overstretched themselves on these are starting to loose their grip and the trickle of £30Bn will become a deluge.