Foreclosures Force Britons to Ponder Shift to Fixed Rates
LONDON, Aug. 22 — Susan Whittaker was desperate. Four years ago, she purchased her first apartment in the town of Rochester, less than two hours east of London. But then interest rates started to rise, and the income from the small shop she ran with her partner no longer covered their adjustable-rate mortgage.
Facing foreclosure, and determined to avoid moving in with her mother, Ms. Whittaker found a way out in an increasingly popular arrangement here known as a “sale and rent back.”
A private company bought her home, allowing her to avoid foreclosure; then the company rented the house back to Ms. Whittaker and her partner and they did not even have to move.
The catch is that the company paid the couple less than the value of their apartment.
Such deals are uncommon in the United States, and mortgage brokers say they discourage them because of the possibility of unscrupulous and dishonest lenders exploiting distressed homeowners.
But desperate times call for desperate measures. While Americans fear an epidemic of foreclosures, brought on by the subprime mortgage meltdown, Britain is already suffering one.
Foreclosures here are at an eight-year high; lenders have repossessed a record 14,000 properties in 2007, 30 percent more than at the same time last year, according to the Council of Mortgage Lenders. An additional 125,100 households are behind in their mortgage payments.
And personal bankruptcies are at an all-time record, caused largely by a crushing increase in mortgage debt. The situation has grown so dire — as has the threat of desperate homeowners being exploited — that the newly installed government of Prime Minister Gordon Brown is trying to change the fundamentals of the mortgage system.
Whether they can is an open question, especially given Britons’ attachment to home ownership, adjustable-rate mortgages and personal debt. British consumers are the most indebted citizens of any Group of 7 nation, and television shows devoted to real estate and debt advice are among the most popular programs in the country.
“We live in a society where we encourage people to take on debt, and there is lots of pressure to get your foot on the housing ladder, which has proven quite a fruitful investment for some,” said Frances Walker of the Consumer Credit Counseling Service, a debt adviser, in London.
Currently, only 5 percent of British home buyers take out fixed-rate mortgages. The norm here is a mortgage with a fixed rate for the first two years, and then a floating rate for the duration of the mortgage.
But the rate on adjustable mortgages has skyrocketed as the Bank of England ratcheted up interest rates — five times over the last 12 months to 5.75 percent, their highest level since 2001.
Add the rising costs of necessities, like food and utilities, and British homeowners find themselves increasingly squeezed. Real estate experts here say that is why more and more homeowners are turning to the practice of sale and rent back.
The mushrooming of the unregulated market has worried regulators and lawmakers concerned that homeowners were giving up their houses for as little as 75 percent of market value, with no guarantee they would be allowed to stay in their former property after six months, the minimum lease period here.
Lawmakers are now trying to figure out how to encourage more homeowners to take fixed-rate loans, but that will not help those already facing foreclosure, or prevent the threat of predatory lending.
If there is a silver lining in Britain, it is that, unlike in the United States, home prices are still rising, for now, after more than tripling since 1997. Recent interest rate increases have yet to reverse the trend. In fact, the National Housing Federation recently predicted prices would rise 40 percent in the next five years, elevating the average price of a home, which already costs about 11 times the average British salary, to £302,400, or $618,000.
As long as home prices rise, distressed property owners can still sell their home and receive enough money to repay their mortgage debt — in theory. In reality, selling a property here can take several months, and by the time many owners are facing foreclosure, they often do not have that kind of time.
Higher prices may push some prospective buyers out of the market, but others will simply take out larger mortgages. Owning a home is so entrenched in the British psyche that most consumers would rather take on additional debt than rent, even if they can’t afford it, say real estate experts.
Some debt advisers have warned that higher demand for borrowing could result in an increase in lax lending practices and plunge more people into personal bankruptcy, which in turn could hurt consumer spending and slow economic growth.
Recognizing that, Mr. Brown’s new government has come up with two initiatives intended to make sure Britain’s housing boom does not turn into a bust. The measures aim to build 240,000 homes a year by 2016 to provide more affordable housing, and to encourage lenders to sell more 25-year fixed-rate mortgages.
Mortgage experts estimate that about two million mortgages will adjust to a higher rate in the next 18 months as their short-term fixed rates expire.
Longer-term fixed-rate mortgages would limit the risk of such interest rate increases, but short-term thinking among British borrowers and the lack of an established covered-bond market in Britain has kept fixed-rate mortgages from ever taking off here.
The United States mortgage market is financed through capital markets — hence some of the problems currently buffeting the markets — but Britain has always been a retail-led mortgage market, financed through bank savings deposits.
Now Alistair Darling, chancellor of the Exchequer, is studying plans to create a legal framework to allow banks and other lenders to issue covered bonds, and to make them attractive to investors, in order to help lenders create capital pools that would finance longer fixed mortgages.
Yet that task could become markedly more difficult now given the current problems with the United States mortgage market. The liberalization of the British mortgage market in the 1980s under Margaret Thatcher’s government removed some credit controls, admitting new lenders who offered mortgages with ever more competitive short-term fixed rates. Longer-term fixed-rate mortgages became even more unpopular in the 1990s when interest rates peaked at 15 percent.
In March, Nationwide, Britain’s third-largest mortgage lender after HBOS and Abbey, became the first large lender to offer a 25-year fixed-rate mortgage after government lobbying and a positive development of the yield curve. “If this deal is ever going to be attractive, now is the time,” Stuart Bernau, Nationwide’s chief executive, said at the time.
Some analysts remain skeptical. “People don’t feel comfortable tying themselves in for that long, and they get turned off by the penalties” of paying off early, said James Cotton, a mortgage adviser at London & Country Mortgages. Early payment fees can reach as much as £300,000 in Britain.
But if the government cannot persuade Britons to change their borrowing habits, experts warn that the country may face its own subprime mortgage crisis, as consumers with tarnished credit find that only subprime lenders are willing to work with them.
“That’s where the real problems will start, and we could easily see what happened in the U.S. repeated over here, ” said Steve Grail, managing director at Grosvenor Trust & Savings, an independent financial adviser in London.
None of this matters to Susan Whittaker. The experience of having to sell her home and rent it back has made any type of loan out of the question. “We won’t get a mortgage again,” said Ms. Whittaker, speaking on the phone from her Rochester home. “The whole episode has put us off.”