The turmoil that has engulfed the mortgage market since August 2007 has left many UK homeowners with mortgage problems. Consumers who have been coming of fixed or discount rates within the last 8 months have found it increasingly difficult to remortgage onto an affordable rate, as banks have been quick to withdraw attractive rates and increase rates even when the Bank of England has been cutting interest rates.
This has also caused mortgage problems for first time buyers who are unable to find suitable mortgages, as many 100% and 95% mortgages have been withdrawn. This in turn could have a negative effect on the UK property market as first time buyers are needed for the market to function properly. The UK's wealth is so reliant on the UK property market that any major downturn could be disastrous for the wider economy. The UK economy is also heavily reliant on the financial service and the service industry in general. We no longer rely or rather have a manufacturing, agricultural or mining industry and therefore as economy we are ill placed when the one sector you rely on is in trouble i.e now.
As in any upturn or downturn, situations are usually over exaggerated one way or another and it seems that this is possibly happening now. There is no denying that the banks have been burnt in the sub prime crisis and have announced write downs of eye watering amounts but it needs to be put into perspective. Write downs are not necessarily physical losses, they are write downs on the balance sheet. If the assets that the losses (i.e predominantly US housing) are secured on begin to increase in value again which is bound to happen at some point, then the banks will naturally recover some of the funds they had written off. Indeed, banks are now at risk of delaying a return to confidence by overstating the losses that will eventually hit the economy. The crisis is taking longer to recover from and more difficult than anticipated because of the risks of adverse news and rumours sparking dramatic falls in mortgage confidence.
The pricing of risk had to be adjusted after years of a booming credit industry but it has now gone from one extreme to the other. The prices implied in some credit markets such as the securitisation market would suggest that Armageddon is round the corner and really the appetite and price should begin to increase.
While downside risks remain, it is likely that the road ahead is that confidence and risk appetite will return gradually over the coming months. A t the end of the day lenders need to lend, that is how they make their money. The financial system cannot grind to a halt.