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XMFSinchiruna (27.46)

Borrowing money to pay mortgages... a financial death spiral for UK families. How many in U.S.?

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July 06, 2008 – Comments (7)

I wonder what the comparable statistic would be in the U.S. right now.  Borrowing money to pay debt is a losing battle. Unfortunately, that's precisely what our government is doing every day.  Tracking this phenomenon is very important, IMO.  As the practise spreads, we create the potential for a sudden surge in mortgage, credit card, and loan defaults that could present a tipping point for many beleaguered financial institutions.  

Families turn to loans and credit cards to cover mortgage bills

July 4, 2008
Christine Seib, Siobhan Kennedy and Lauren Thompson

More than four million households have resorted to personal loans or credit cards to cover mortgage or rent payments in the past year.

The financial comparison site Moneysupermarket.com said that many more homeowners could be sucked into a spiral of servicing long-term debt with expensive short-term borrowing when about £30 billion of mortgage deals come to an end this month.

It pointed out that homeowners who take a personal loan to repay a mortgage, but lie about the reason, risk being charged with fraud.

Tim Moss, head of loans at Moneysupermarket.com, said that the findings of a survey by the site were shocking. “Having a roof over your head has to be your top priority but funding that with a loan you might default on or a credit card that will eventually charge you interest of over 15 per cent isn't the solution.”

James Gordon, retail director at Ernst & Young (E&Y), the accountants, said family finances were under enormous strain as the rising cost of living squeezes their budgets to breaking point. “The consumer economy is undoubtedly on a knife-edge,” he said.

This week the Bank of England revealed that credit card borrowing staged its sharpest rise in May for almost two and a half years. A survey by E&Y found that households were 15per cent worse off than they were five years ago.

Homeowners are spending 78 per cent more on mortgage repayments, paying an average of £735 a month. Energy bills have jumped 100 per cent, petrol is up 29 per cent and council tax 25 per cent.

The squeeze on households was underlined by the Bank of England's latest report on credit conditions. It showed that home loan payment defaults were rising faster than banks and building societies had expected.

More evidence also emerged that the credit crunch is continuing to hit the real economy with an influential survey showing that the dominant services sector shrank last month at its fastest pace in seven years.

Overall services activity tumbled during June at a rate not seen since the aftermath of the September 11, 2001, attacks on the US, according to the latest CIPS purchasing managers' survey of the sector.

The news followed the CIPS manufacturing and construction surveys this week, which showed those sectors contracting. It was the first time that all three industries have shrunk simultaneously in any month since November 2001.

The Chancellor insisted yesterday that the economy would not slip into a recession, despite mounting evidence that the outlook is worsening. Alistair Darling said: “The UK economy is fundamentally far, far better than it ever was in the past.

“We're going through a very difficult time at the moment, along with every other country in the world. I believe that our economy will continue to grow ... although the rate of growth will be slower.”

http://business.timesonline.co.uk/to...cle4265675.ece

 

7 Comments – Post Your Own

#1) On July 06, 2008 at 10:49 AM, alstry (35.36) wrote:

You think we may be there already?

Small business owners tapping credit cards to stay afloat.  Now homeowners?

If its 4 million in England.....6 to 8 million would not be a stretch or about 1 in 10 to 1 in 15 households.

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#2) On July 06, 2008 at 11:39 AM, colonelnelson (45.36) wrote:

Financing long term debt with short term loans?  Crazy.

On the other hand, on this side of the pond we have the payday lending people, which is equally insane.  Imagine being perpetually 2-4 weeks behind your paychecks and needing these sharks to pay the rent, keep the lights on, eat...

Thanks for bringing this to our attention, Sinchiruna.  Looks like I picked a bad time to plow money into English banks. 

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#3) On July 06, 2008 at 11:53 AM, nuf2bdangrus (< 20) wrote:

Short the british pound FXB or use puts.  Couldn't get the shares to short Thursday, and didn't get a bid on the put, the spread was too large.  I'll be at it again Monday.  Long the YEn and the YUAN

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#4) On July 06, 2008 at 1:19 PM, AnomaLee (28.58) wrote:

The UK has been ahead of the U.S. I was convinced the UK(and U.S.) crossed the tipping point sometime around the Norther Rock debacle. I think the situation is far worse than here, and that Barclay's is just as bad(if not worse) as Lehman Brothers. 

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#5) On July 06, 2008 at 2:35 PM, Nainara (< 20) wrote:

Anyone care to speculate on the consequences of this trend? Someone correct me if I'm wrong, but a widespread buildup of short-term debt implies that borrowers are reaching the limits of their solvency.

This means that in the near-term future (dependent on the extent of the credit facilities available) either borrowers must:
1) Cut spending/consumption in a big way -or-
2) Default on both long-term and short-term debt 

In all likelihood I think we'll probably see a combination of both. A direct result of #1 will be recession and demand destruction, of #2, I'm not certain.

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#6) On July 06, 2008 at 2:50 PM, Nainara (< 20) wrote:

Just an additional thought:

Suppose that you were a legislator in the US (or UK) government, and your only interest was to avoid allowing the problem of a massive wave of consumer default to come to a head now, how could it be attacked/pushed forward?

My solution would be to expand credit availability in any way possible. The federal funds rate can't be reduced much more without public outcry, but I wonder if it would it be feasible for the Fed to quietly start expanding the number of banks eligible to borrow at the primary discount rate?

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#7) On July 06, 2008 at 3:15 PM, XMFSinchiruna (27.46) wrote:

Nainara

Certainly, both of the scenarios you suggest will occur in some combination.  The impact of the second will be complex, but will include banks going bankrupt, expanding poverty and homelessness, and continued Fed intervention to the direct detriment of the USD.  Gold is the clear counter-play.

 

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