Robert Peston has spreading alarm today. He has said taxpayers are exposed to loss on £41 billion of Bradford & Bingley mortgages. This is not true for three reasons. First, many of them will be of acceptable quality. Even if a significant number are buy to let mortgages, where he says there is risk that the landlords might just return the keys, there is an active rental market, and many of these properties will have an income attached to them. That makes them a performing asset, even if not at full value. Third, there is an easy way out of this crisis, although Peston does not mention it.
Let's suppose the average mortgage is for £180,000, for 25 years, is a repayment mortgage and the rate available is 7% (which is fair). According to the BBC mortgage calculator (and I'm presuming it works reasonably: by my logic it looks right) then this scenario creates a monthly repayment of £1,287.15. Interest only it would be £1,050.
It's not long ago that people were getting rates of around 5% as introductory offers. That would have cost £1,064.28 a month. At those rates many more people could afford their loans. It's clear that a margin of £200 a month makes many more mortgages unrepayable.
It so happens that right now it seems that a property on the market for about £200,000 (i.e. worth just a little more than the above mortgage) rents for a bit over £800 a month in areas I am familiar with. That £200 a month margin is clearly important.
So what would make these mortgages viable? The answer is simple: a 3% rate cut would make all them viable. On a repayment basis that mortgage would come down to £960 a month. On a repayment basis it would be £600 a month. Any buy to let landlord can make a margin on that. Many households would be better off: they could begin to tackle other dent issues.
Suddenly almost every mortgage on every banks books in the UK ceases to be toxic. This does not remove the US risk. It does not stop other debt issues. But a massive exposure risk for UK banks, which is more than enough to wipe out their capital, is eliminated. And at no cost to the Treasury.
The advantages are obvious. Most banks will have their balance sheets stabilised. The housing market will have a line draw under it. The risk of deflation, which is enormous at present, will be mitigated by the inflationary impact of a rate cut. Companies that look likely to go bust, such as MFI, may get the boost they need to stay in business. Business will be better able to afford investment. The cost of the extra government borrowing will go down, considerably. People will stay in their homes. The state will not have to rehouse them. The downward pressure on house prices from re-possessions will slow or stop. The private rental market will not collapse as landlords give up their properties. Chaos will be avoided.
And yet as far as we know only one member of the Monetary Policy Committee to cut rates. That's because they have been given the wrong brief by a poorly advised government and have been lead by bankers who have no concern for society at large, being largely isolated from it.
I made a lost of things the government should be doing this morning. Here are some more:
1) Bring the Monetary Policy Committee back under Whitehall control
2) Get Mervyn King off it
3) Give it a brief to manage rates in the interests of the economy as a whole
4) Cut rates by 3% now
5) Review rates weekly for the time being.
It seems so glaringly obvious that doing this could avoid catastrophe in the UK economy that it is staggering that it has not happened. It's time Gordon Brown ate humble pie and over-rode this generally inept committee. We cannot afford for him not to.
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Firstly, I just read Robert Peston’s article, and he didn’t say anything different from you on the risk. Neither of you is suggesting that ALL the £41bn is at risk.
Secondly, a 3% interest rate cut would more than halve the income for people living on their savings. Not exactly an incentive to save. (And I speak as a net borrower, not a net saver.) An across the board rate cut would be far too blunt a weapon. It would benefit all borrowers, not just the ones in need. It could even lead to a redistribution of wealth from the poor to the rich. Not what we need.
Thirdly, what’s needed is quick legislation to limit severely lenders’ ability to repossess residential property. There must be scope for imaginative solutions here. At the end of the day, people need houses, and the values will go up again in the end. What’s needed is simply a good long view. And action.
Brian
I’m a bit surprised you can’t spot the difference, but I think some things are more important than that.
Dealing with your issues:
a) Those with savings need strong banks. This policy is about ensuring that
b) There is no way reducing the income of the rich can lead to redistribution in their favour
c) I have demonstrated time and again commitment to your third cause. See this. http://www.taxresearch.org.uk/Blog/2008/07/29/tackling-the-mortgage-crisis-a-real-alternative-is-possible/
I hope that changes your mind
Richard
A cut in interest rates would effectively devalue the £.
Imports costs would increase and hit those on lower & fixed incomes. It would be a blunt transfer of wealth from savers to borrowers. Both RPI and CPI would increase, deflation and inflation at the same time acting in ways not equal and opposite. eg prudent savers looking to buy could be thwarted by having savings continually diluted.Whilst those knowing how to use the system win.
Housing is just artificially overvalued,a rigged market in favor of HMG and developers, designed to extract tax and cross-subsidize (unfairly) social housing and engender rising prices.No tax on unused land banks, private building v difficult. Add unlimited immigration, no / low public housebuilding funded directly, wrong CPI target.
Political manipulation & exploitation of the boom in spending was also responsible.
Independent ‘Policy’ controlled MPC is needed. eg if RPI had been targeted the boom would have been curtailed earlier. If all HMG borrowing was transparent, pressure for interest rates to rise,may have slowed and curbed some of the excess, limiting the impact
Housing should be valued at market value using discounted cashflow in cases of default and assumed by a Social Housing Trust or a higher private bid. Renter paying agreed rents should be protected from eviction on foreclosure. The trust should then as appropriate offer new tenancy agreements.
Housing value should be allowed to fall, the losses sustained should be attributed to the owners in the normal way.
New banks/building societies should be setup with strict limits on rules on finance.
A body like HMG should control the growth in the money supply at the same time as aiming to maintain its value. Banks should not be freely at whim to just create ‘money’ without increasing real capital at BOE.
Preventing bubbles should be one of the aims of HMG not just softening busts. Some counter cyclical measure independant of HMG of the day.
That said im sure interest rates will fall in 2009, if not earlier,but pushing on an elastic string also helped form this bubble by hiding non performing assets, until it now.
I think an election is long overdue, that may give us some hope and a new start and a new mission.
HMG needs to be ready to help manage the economy and pump prime to offset deflation impacts in construction for example in carefully targeted areas that add value. eg Energy infrastructure, Transport, Green initiatives etc.