UK prime mortgages

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Estate agents banking on a rapid recovery in the UK housing market should think again. Fitch’s analysis of securities based on mortgages to prime borrowers suggests the market could be struggling for years to come.

One reason for this is the scale of negative equity. Approximately 10 per cent of prime borrowers already have mortgages larger than the market value of their property. Fitch expects this to increase sharply to 34 per cent by value (or 23 per cent by number of borrowers) if house prices, down by just below 20 per cent from the peak so far, fall by an expected total 30-35 per cent.

Prime borrowers with good credit histories are, of course, unlikely to default solely because of negative equity. Another trigger is necessary, usually unemployment, loss of earnings or divorce. Moreover, in the UK, in contrast with the US, the borrower is responsible for any shortfall arising after repossession. Jingle mail – by which defaulters mail the house keys back to the mortgage-provider – is unattractive in a legal environment in which lenders have 12 years to recover any shortfalls.

A large number of borrowers with no or little equity will depress any recovery. To sell their home or remortgage, those with negative equity must raise cash to bring their loan-to-value ratios in line with tightened lending criteria. It is unlikely that already financially stretched borrowers will be able to do so: salary increases are rarer than rocking horse manure. Many face shorter working weeks or overtime bans. They are stuck in their homes, creating a hidden glut of property. This overhang of property in the hands of highly leveraged homeowners, combined with the large number of people who have been waiting for prices to stabilise before selling, will be enough to choke any recovery in prices.

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