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UK Mortgages and Property Price Trends
This webpage was prompted by asking a very simple question; "Where is all the credit coming from to fund these extraordinary mortgages sometimes based on 9 times people's salaries and many self certificated?" In fact the only thing I have achieved quite readily is to show the part played by the Building Societies, the traditional Banks and the specialist mortgage companies. So far I have only managed to skim the surface of where and how these organizations are actually funding this enormous mortgage debt which now stands at over £1 trillion. To examine how this funding has taken place requires a further exercise on my part and I am not that confident of getting very far. There are two straightforward observations from all of this; the first is that because property is a very limited commodity in the UK (planning laws, flood plains, speculators sitting on land etc.), most of the 'investment' over the last ten years has gone into pushing up house prices (creating 'the bubble'), without creating enough new homes to meet the swelling population. Supply and demand dictates that if there is a limited commodity it will be rationed by price, but the free availability of credit has meant that more and more people are able to bid higher than normally causing this price distortion - take away the credit and demand dramatically falls. The second observation is that the majority of the credit is not supported by the organizations retail customers, but comes from the wholesale market (in other words the 'global economy'). OK, this is actually a third observation, when you ride on the back of the world economy you cannot rely on traditional means such as drastically lowering Central Bank interest rates to get you out of the mess, because you pay the world rate not the Bank of England rate. Also if you trash the currency, you put yourself in an even worse position because your major and now almost the only contributor to the UK economy, the Financial System, gets trashed as well. Maybe we should have joined the euro after all - but this time I would question if we genuinely meet the criteria.
There are at least two types of Mortgage Lenders in the UK, namely the Mutuals and the Public Limited Companies. It should be noted that legally, the Building Societies in the UK are only allowed to fund up to 50% of their borrowings from the wholesale market, with the remainder coming from retail investors. Also, at least 75% of their business assets must be fully secured against residential property. Concerning banks in general I have found it quite difficult to pinpoint any specific regulations regarding the non mutuals. Just recently I read that there are some European regulations that impact our banks and that they are likely to be tightened in the near future. It seems that the tripartite of the Bank of England, the FSA and the Treasury act as a sort of ad-hoc regulatory authority but does not seem to be very effective. For example the banks (as are Building Societies) are allowed to hide profits and losses by holding them as off balance sheet items.
UK Mortgage Pie
The following Pie Chart shows how the UK outstanding mortgage debt is split between the Bank and Mutual Groups as at the end of 2007. The figures are expressed in £bn and total about £1.11 trillion out of the total market of £1.21 trillion. It was a little bit impractical to show all of the lenders, so the percentages are slightly over-stated. Nevertheless, this is an interesting chart because it shows in graphic format the major players. Once the current wave of nationalizations, takeovers and mergers are completed it will be interesting to look at the differences. Higher mortgage costs and lower saver rates are definitely on the cards as competition is reduced.
The Mutuals
The following table shows each Building Society, where rank is by size of assets. Note that the Portman Building Society has merged into the Nationwide in August 2007 and the Universal Building Society was absorbed by the Newcastle Building Society in late 2006. During 2008 with the worsening economic situation, there have been a number of mergers and takeovers and it looks like this trend is set to continue into 2009. I am now using the Microsoft Silverlight DataGrid, to show a table of the UK Mutuals. This gives a significant improvement on presentation since it is now possible to click on the column headers to sort by name or rank of organization. You will therefore need to install the Silverlight 2 plugin to view :-
Please note the rank indicates the size according to Asset value.
At the end of February 2007 Building Societies and their subsidiaries held about £221 bn of mortgage assets which represented about 20% of the total UK market. The Building Society assets above not only include mortgage assets secured against land, but also other loans and investments, liquidity, office premises and other assets. Overall assets secured against land is 77.5% as an average across all Building Societies.
The Major UK Banks
The following list shows the major British banking Groups according to the British Bankers Association (BBA) website. Note that Abbey Group is included in this list even though it is actually owned by Bank Santander of Spain. The size heading refers to size of bank in the UK. Note that the Nationwide Building Society if it were a non mutual would appear in the table below at number 6.
| PLC | Subsidiaries | Rank | Assets £bn | Mortgage Lending £bn | Notes |
|---|---|---|---|---|---|
| BARCLAYS GROUP | Woolwich | 3 | 522.089 | 69.7 | Nov 2007 £1.3 bn write down. May 2008 announces £1.9 bn write down. So far October 2008, has avoided being part nationalised, but needs to find some new capital in the near future. |
| Woolwich | |||||
| HALIFAX BANK OF SCOTLAND GROUP (HBOS) | Birmingham Midshires / Intelligent Finance (internet bank) | 4 | 422.881 | 235.0 (June 2008) | As part of the Governments plan for part nationalisation of certain UK banks this is likely to be merged in with Lloyds TSB. |
| HONGKONG SHANGHAI BANKING CORPORATION (HSBC) | First Direct | 1 | 662.710 | 39.1 | For 2007 announces £5.9 bn writedown. May 2008 announces a further £1.6 bn write down |
| LLOYDS TSB GROUP | Scottish Widows / Cheltenham and Gloucester | 5 | 343.598 | 95.3 | December 2007 £201 m writedown due to credit crunch. May 2008 announce £387 m writedown of various assets. |
| NORTHERN ROCK PLC | Legal and General Bank and Mortgage Services / Eskimo Loans | ? | UK Government nationalises the bank in February 2008 after failing to find a buyer, following collapse in September 2007 | 77.3 | UK taxpayer has £29bn stake courtesy of Brown and Darling. Nov 29 2007 Eskimo Loans stops lending against unsecured loans - what took them so long?? |
| RBS (ROYAL BANK OF SCOTLAND) GROUP | Natwest / First Active / The One Account (with Virgin Direct) / Direct Line | 2 | 583.467 | 67.5 | Estimated 1.0 bn writedown. Apr 2008 Announces £12bn rights issue. October 2008, UK Government steps in and sacks top management, and lays the path for a part nationalisation depending on take up of new rights issue. |
| Part of Royal Bank of Scotland (RBS) | Direct Line | Direct Line specialises in Insurance but also offers mortgages | |||
| SANTANDER GROUP | Abbey/Alliance Leicester/Bradford & Bingley | 2 | |||
| Abbey Group includes Cahoot Internet Bank | Was UK 6th | Santander Group - Spain | 101.7 | ||
| Taken over by Santander Group Sept 08 | Alliance and Leicester plc | 7 | Santander Group - Spain | 40.0 | Girobank - although no longer traded |
| Sep 29 2008 the UK government steps in and sells the Savings assets to Santander and nationalises the debt. | Bradford and Bingley plc | 10 | Santander Group - Spain (Savings) | 31.1 | Mortgage Express |
Minor UK Banks
Since the BBA has defined the major UK banking groups I have fairly arbitrarily defined other banks on this website as minor banks. There are a lot of them so I have just listed those that are in the mortgage lending business.
| PLC | Rank | Assets £bn | Mortgage Lending £bn | Parent Company | Notes |
|---|---|---|---|---|---|
| Co-operative Bank | ? | 3.3 | Part of Co-operative Group which also comprises C.I.S. and Smile internet bank | ||
| Egg Banking plc | ? | Now owned by Citigroup. | June 2008 announces it is pulling out of the UK Mortgage Market for new loans | ||
| Standard Life Bank | 19 | ? | 11.3 | Demutualised in 2006 |
Mortgage / Loan Specialists UK
The following are not retail banks in the sense that they do not take deposits from retail customers. In order to fund their mortgage lending they have to bid for funds on the wholesale market.
| PLC | Rank | Assets £bn | Mortgage Lending £bn | Parent Company | Notes |
|---|---|---|---|---|---|
| CHL Mortgages | ? | 5.8 | Irish life and Permanent | Oct 2008 - Announces restructuring plan and has no plans for any Mortgage lending in 2009 | |
| First National | ? | 11.7 | Part of GE (General Electric) Money | Specializes in secured loans and mortgages | |
| GMAC Residential Funding | ? | 11.3 | General Motors | Market leader in sub prime lending | |
| iGroup | ? | Part of GE (General Electric) Money | Specializes in mortgages to people with County Court Judgements. Nov 2007 stops lending against unsecured loans | ||
| Irish Permanent International | ? | Offshore bank on Isle of Man specializing in Buy to Let | |||
| London Mortgage Company | ? | 7.9 | Lehman Brothers | Sept 2007 - This is closing, but Southern Pacific Mortgages is not. Lehmans are expecting £2.8 bn loss in 2008, after selling shares for £4 bn and going for another £6 bn share sale. It has alread disposed of £65 bn of assets related to mortgages. | |
| Mortgages PLC | ? | Merril Lynch | |||
| Paragon Mortgages | ? | ? | 10.2 | Buy to Let specialist - Owns Mortgage Trust. Nov 2007: likely Rights Issue announced, selling off car loans | |
| Southern Pacific Mortgages | ? | Lehman Brothers | Sept 2008 - Lehmans filed for Chapter 11 bankruptcy. Its North American operation has been bought by Barclays and its Asian and European interests have been taken over by Nomura | ||
| Tesco Finance | ? | Tesco markets First Active mortgages (part of RBS) and acts as a broker | |||
| The Mortgage Lender | ? | December 2007 - goes into administration. Specializes in Customers with unusual or difficult financial circumstances |
Foreign Owned UK Brands
| PLC | Assets £bn | Mortgage Lending £bn | Parent Company | News |
|---|---|---|---|---|
| Bank of Ireland | Based in Irish Republic | Announced 23/11/2007 it was pulling out of sub prime mortgage market | ||
| Bristol and West | ? | 25.6 | Bank of Ireland | ? |
| Clydesdale & Yorkshire Bank | ? | 10.8 | National Australia Bank | ? |
| First Trust Bank | Allied Irish Bank (AIB) | ? | ||
| Future Mortgages | Citigroup | Specialises in loans to people with bad credit rating | ||
| Kensington Mortgages | 6.6 | Investec - South Africa | Announced 22/11/2007 it was pulling out of sub prime mortgage market | |
| Yorkshire Bank | National Australia Bank | Although trading separately, figures have been included in Clydesdale & Yorkshire Bank above |
Foreign Banks Offering Mortgages in UK
| PLC | Size | Parent Company | Notes |
|---|---|---|---|
| ING Direct | ING Netherlands | ? |
Over £One Trillion Mortgage Debt in UK
A trillion is a number with a lot of zeros on the end i.e. 1,000,000,000,000 or one thousand billion if you prefer and the headlines have been talking about the UK mortgage debt being over a trillion pounds. Let's see how the numbers stack up based on figures above :-
The Mutuals - £221 bn
Major Banks - £731.5 bn
Minor Banks - £10.4 bn plus
Mortgage Loan Specialists - £42.9 bn plus
Foreign Owned UK Banks - £16.7 bn plus
Grand Total = £1022.5
Considering these figures are primarily based on end 2006 figures and some of the small fry have not been included this leads me to believe that the figures above stack up. It also makes me think that not only was the FSA asleep with Northern Rock, but it was never awake in the first place. It's hard to believe that when the FSA was created by Brown in May 1997 UK mortgage debt stood at a mere £419 bn and that we have been through (for the most part of the ten years) a low inflation period.