More than a million homeowners could be at risk of serious financial difficulty and possibly losing their homes in an economic slowdown, the City regulator warned yesterday.
The Financial Services Authority is preparing for a tougher climate of rising inflation and a slower economy. It fears that many homeowners with large mortgages who have borrowed three and a half times their salaries or more could be at risk.
The warning comes as surveyors predict today that 123 homes a day will be repossessed this year. The FSA cites three warning signs on mortgages:
· The loan was taken out for longer than 25 years;
· It is worth more than 90% of the home;
· The amount borrowed is 3.5 times or greater than income .
Over a third of all mortgages sold between April 2005 and September 2007 fall into one or more of these categories. This suggests that more than 2m of the 5.7m mortgages written during this period are of potential concern.
It is the 1.04m customers whose mortgages contain two or more characteristics who most concern the FSA. It calculates that the number "most likely to default on loans" - those whose mortgage falls into all three categories - is 150,000.
The regulator is concerned that many borrowers are badly prepared for worsening economic conditions. It believes homeowners may have become too reliant on cheap credit and rising house prices to sustain levels of spending.
The FSA's concerns are based on the current economic climate deteriorating and an end to the easy credit available to many customers over the past two years.
A "significant minority" of customers could find their finances become very tight if lenders react to any worsening in financial conditions by cutting the number of mortgages they are prepared to sell.
The pressure on homeowners may not be eased by cuts in official interest rates either. The Bank of England is expected to sanction another cut next week - on top of its quarter point reduction in December. But the FSA admitted it was "not clear" whether the reduction would be passed on by the mortgage lenders, whom it notes could actually raise rates to deal with the pressures on their business.
Lyndon Nelson, the FSA's head of financial strategy and risk, said: "It is not necessarily the affordability of the mortgage. It is their other debt. Customers with other borrowing in addition to the mortgage are struggling."
"The other borrowings tip them over the edge," he said.
This could have repercussions for the wider economy if house prices start to ease and other spending slows.
The warning comes in the FSA's Financial Risk Outlook, which it uses to describe the risks it sees over the next 18 months. The regulator notes that the new loans were "concentrated in groups which historically have not been homeowners" which could make it difficult for lenders to predict how they will behave.
The FSA also points out that the level of repossessions is still relatively low, but believes they will rise. This is borne out by the Royal Institution of Chartered Surveyors, which today predicts about 123 homes a day will be repossessed this year.
The FSA has already sounded the alarm over 1.4m fixed-rate mortgages which are due to mature in the next 12 months and has warned mortgage lenders not to rush into repossessions.
The warning is just one of the "priority" risks it has identified for the next 18 months. The others include customers losing confidence in another financial firm, in the way they did with Northern Rock; concerns about the business models of some banks since the credit markets tightened; and a potential increase in finance crime caused by the downturn. |
