More than one million overstretched borrowers will struggle to pay their
mortgages this year as the credit crunch deepens and the banks tighten their
lending criteria. That was the ominous warning from the Financial Services
Authority this week.
The financial regulator said that one third of the 5.7 million people who
borrowed a mortgage between April 2005 and September 2007 are in danger of
defaulting. According to the watchdog the risk could be even higher when you
take into account the numbers paying higher interest rates. About 1.4
million borrowers will see their mortgage repayment soar by an average of
£210 a month when their low fixed-rate loans come to an end this year. Add
to that the Land Registry’s announcement on Tuesday that house prices
continued to fall in December, and the earlier forecast by the Council of
Mortgage Lenders that the number of repossessed homes would rise by 50 per
cent to 45,000 homes this year, starts to look like a conservative estimate.
But not everybody is glum. Sanguine negotiators are taking advantage of the
rising numbers of repossessions and falling property prices to knock off up
to 20 per cent from the market value of homes seized by lenders from
borrowers struggling to pay their mortgage.
Some of these bargain hunters are first-time buyers grabbing their first
decent opportunity to get their foot on the property ladder. Many more are
investors hoping to resell their repossessed property at a profit.
By the end of the year, 45,000 homes will have been repossessed from
overstretched borrowers as the credit crunch deepens and the banks tighten
their lending criteria. That is the depressing forecast from the Council of
Mortgage Lenders.
Among those out looking for deals is Heenal Lakhani (27), managing director of
Fenwold Properties Ltd, a property investment company. “As a rule of thumb,
you can get them at 15 per cent below market value, if not 18 per cent,”
says Lakhani. “Not many people like to buy them because they are often
sealed up, cold and damp. You can’t see them properly. The plumbing might
not work. The electricity might be down. It puts buyers off.”
His recent deals include an ex-council one bed flat on the top floor of a
mansion block near Tower Bridge which he bought for £250,000 before
Christmas and just sold for £285,000 without changing anything. Towards the
end of last year he also bought a two bedroom ground floor flat in
Shoreditch for £270,000 even though it was valued at £330,000. He is keeping
that property to let.
But for Lakhani, some of the most profitable deals take place when he buyers
in bulk. This is one example of how it works. In March 2007 Lakhani bought
four similar flats in the same block near the City for an average price of
£445,000. All four had all been repossessed from another investor who had
run into trouble. Lakhani sold all of them for "far more than I paid.
“I had to compete with another buyer who was prepared to pay £50,000 more
for one of the flats. But if there is a bulk of properties, the banks like
to sell it to one person who they know will act quickly,” says Lakhani. So
the bank got its quick sale. The estate agents got two lots of fees from the
same property and the Lakhani got the deal over somebody else.
In theory, banks, surveyors and estate agents have a legal duty to sell a
repossession at the best possible price and are in danger of being sued by
the former borrowers if they do not fulfil their obligations. Estate agents
readily tell stories of successful sales of repossessed homes.
Cory Askew, an estate agent at Chesterton’s Docklands branch where 25 per cent
of the fees come from selling repossessed homes, says that 10 of the 15
repossessed flats they sold last year went to sealed bids and fetched more
than the asking price. He recently sold a nice little flat to a first-time
buyer working in the city who paid close to asking price. Ed Mead of Douglas &
Gordon in West London sold a repossessed one bedroom flat in Chelsea for
£250,000, £75,000 more than the asking price, even though there were only
eight years left on the lease.
But such stories represent a tiny fraction of the market as a whole. According
to Julien Holmes, managing director of Crown Mortgage Management which
chases debt for sub-prime mortgage lenders around the country, most
repossessions are impossible to sell at full market price. He says: “If it’s
an unpleasant repossession, the occupiers quite often trash the place. They
take all the kitchen units, pull out the bathroom fittings, smash the
windows, take off the doors and worse, much much worse. Often, we have to
clean up and have the place repaired to sell it on the open market.”
The properties in the worse state tend to either go straight to auction or end
up there after an unsuccessful stint in the open market. Here they will sell
at an even great discount, if at all.
Holmes explains that the sales price of one of their repossessed homes is
currently five to 10 per cent lower than it would be if the borrower had
sold it themselves. There is a further drop in price of between six and 10
per cent if the property goes to auction. “Of course there are exceptions,
we are sometimes able to sell at full price if the property is in good
conditions and the losses might be greater if the property has been
‘vandalised’ before the occupiers leave,” he says.
As the property market weakens and house prices drop, a greater number of
repossessed homes are likely to end up at auctions at even lower prices.
Tony Webber, auctioneer at Eddisons in Leeds, says: “This time last year
most of the repossessions were selling well through estate agents. But as
the credit crunch deepens and the lending situation changes, more
repossessions are coming to auctions. We have to set the guide price at 20
per cent the market value to get people in the room.”
Even after the discount many are failing to sell which suggests that investors
are waiting in the sidelines for prices to drop even further. “We are
selling 60-65 per cent of our properties compared with 85 per cent at the
peak of the boom,” says Webber.
The CML expects the number of repossessions to rise by 50 per cent in 2008,
from 30,000 in 2007. These are levels not seen since the mid-1990s when the
property market was recovering from the recession earlier in the decade. But
the number of repossessions is still down from the heights reached in the
early 1990s, after the property crash when 80,000 homes were seized by
banks. At the time many were sold through auctions at rock bottom prices to
buyers who made handsome profits from the decade-long boom in prices that
followed.
It is unlikely that we will see a repeat of the 1990s property crash in 2008.
The most gloomy prediction come from Capital Economics which forecasts a 5
per cent drop in prices. But even this brings plenty of opportunities for
those with the strongest stomachs. As Lakhani puts it: “I think there is
still good value in the market. There are a lot of desperate people out
there.”
Eddisons will hold its next auctions at The Village, Prestwich, Manchester, on
Tuesday, February 19, and at Leeds United Football Club, Elland Road, on
Thursday, February 21. www.eddisons.com
Fact file
Most lenders prefer to reach an arrangement with a borrower than to repossess
a home.
120,500 homes had arrears of more than three months last year. 22,700 of these
were repossessed.
170,000 homes will fall into arrears of more than three months in 2008, says
the Council of Mortgage Lenders.
Properties sold by the owners usually fetch higher prices than those seized by
lenders.
The lender has a duty to sell at the best price, but speed of sale is also
important: most aim to sell a repossession within three months.
Borrowers must pay interest on the mortgage after the property has been
repossessed. They also have to pay estate agent and legal fees.
It´s simple, it´s a chain event. That is to say that when the first time buyer can´t get a mortgage, the market freezes. In turn the 2nd time buyer can´t sell because there is no first time buyer, and so it goes on. Recent stats show that some first time buyers would need a multiplier of 7 X their income to get a mortgage, and now that banks are asking for 25% deposit, it will be a very long time before the market moves. I have lived through these boom to bust cycles for the 50 years, history always repeats itself. Here s a message to all the greedy people who speculated. You are about to get your come uppance, and hopefully also the greedy shareholders of the banks. A roof over one´s head at a reasonable cost is a right, not a luxury. All that will happen is that the Government will be forced to assist local authorities to build more houses for reasonable rents to accomodate the majority of people who live in this country, and all survive on pitiful wages. See if I am wrong in 2 years
Jasper, Northampton, UK
I believe there will be a drop in house prices in some areas however, what is more likely is the market to become static. There is still more demand than properties for sale in many areas, and interest rates are still at historic lows in comparison to the last housing crash. Yes there may be a drop in the short-term, and if the Bank of England acts quickly enough by cutting interest rates further, a recession may be avoided (this is a key point - market sentiment rather than economic theory, which Mervyn King seems to oblivious to, he could learn a few tricks from the US). Only if a recession takes hold then house prices will drop substantially, as seems to be the popular obsession by the press at the moment. However, as much of the UKs trade is done with Europe and the pound had now weakened against the Euro over the last few months, there is a chance the market can stabilise. The market has been due a correction in some areas, but it may not all be doom and gloom. Time will tell.
A Douglas, Edinburgh, Scotland, UK
I think a drop in house prices of only 5% is very optimistic.Even if they stay startic,they will fall by 5% due to rising inflation.I think a drop of around 15% is nearer the mark.Another factor is that people can be chased for up to 12 years for the shortfall which could be over £100,000 in some cases.These people will not be buying again in the near future due to the ending of sub-prime loans.More houses for sale than buyers can only result in one thing.Also the population is falling at the younger age group which will result in less 1st time buyers.Also,Barret are advertising on television.This sums up the state of the current housing market.
stephen hulton, eure, france