Banks swamped by a wave of personal debt

The banks are braced for big losses on mortgages and personal loans

Iain Dey, David Smith and Rachel Bridge

Amanda Coleman has been finding work more stressful. As an adviser at the Consumer Credit Counselling Service’s call centre in Leeds, she sees the sharp end of the recession.

The most common problem she sees is mortgage arrears, with families scrambling to save their homes. “We see a lot of situations where a family is trying to pay a mortgage of £800 or £900 a month on nothing more than the jobseeker’s allowance of £60 a week,” said Coleman, who has worked for the debt advice charity for five years.

“It’s hard when you are going through their affairs and realise it’s completely impossible for them to stay in the house.”

Coleman’s clients are about to deliver the sting in the tail of the credit crunch and the next blow that will land on our battered banks. Having been thumped by losses on bad corporate loans, more of which will be revealed this week when the banks announce half-year results, they are braced for a fresh tide of losses from dud loans to individuals.

Based on estimates provided by the International Monetary Fund, lending to British consumers could cost the financial system more than £100 billion in bad debts before the recession is over.

Abbey, part of Santander, set the tone last week, revealing generally good results but warning that it had suffered a rise in provisions compared with a year earlier “attributable to residential mortgage and unsecured personal loan portfolios”.

A good indicator of the shape of things to come is credit card arrears. Britons owe £1.46 trillion, according to the latest Bank of England figures. Most of this, £1.23 trillion, is mortgages, although £231 billion is unsecured consumer credit, of which, £54.5 billion is owed on credit cards.

Moody’s, the credit-rating agency, revealed last week that British credit-card companies are writing off, on average, 10% of their debts — the highest since it started tracking the data in 2001, and a 50% increase on a year ago.

This looming flood of bad debt leaves experts uncertain about the prognosis for our big banks. The headline on a recent research report by Sandy Chen, the Panmure Gordon analyst, summed up the mood: “UK banks: it ain’t over yet”.

It’s not only City institutions that should be worried — thanks to the bailouts of Lloyds and RBS, we are all now big shareholders, with £70 billion collectively invested. The taxpayer will have to stand behind the asset protection scheme, a £585 billion government-backed deal to catch the worst of the bad debts from the lending spree of the past five years.

All this threatens a Catch-22. Alistair Darling, the chancellor, is urging banks to lend more to stimulate the economy, threatening them with a competition inquiry last week.

The mounting losses on corporate and personal lending, however, is pushing them in the opposite direction, making them anxious to conserve cash and rebuild their balance sheets. Without the extra lending, the economy will take longer to recover, unemployment will rise, more loans will turn bad — and the cycle continues.

IN HALIFAX, about 20 miles west of Coleman’s office in Leeds, Peter Sargent, a partner in Begbies Traynor, the insolvency specialist, is just as busy. He has spent 30 years helping people sort out their debts, but the cases now passing through his office are more extreme than anything he has seen before.

“I do not bat an eyelid these days when someone comes in with £75,000 in debt on credit cards and unsecured loans,” said Sargent, who is also president of R3, the insolvency practitioners’ trade body. “In the 1990s, you would have considered £25,000 a lot.

“The recession is showing no respect for social standing. Solicitors, pub landlords, teachers — everyone is being hit. These people have had to realise that their house is no longer a gigantic cash machine that they can simply draw money out of whenever they choose.”

Official figures to be published this Friday are expected to show another large rise in insolvencies. In the first three months of the year, there were nearly 30,000 personal insolvencies; more than 19,000 bankruptcies and nearly 11,000 individual voluntary arrangements (IVAs). Members of the Association of Business Recovery Professionals expect 139,000 personal insolvencies this year.

The figures reflect the length of dole queues and so can reasonably be expected to keep climbing. Economists predict unemployment could hit 10% — a figure not seen since the early 1990s, or even 12%, as bad as in the mid-1980s. And it is not just the unemployed who are struggling. Many companies have put staff on short weeks or cut overtime. Coleman said: “We are seeing lots of people put on reduced hours who are now three months behind with their mortgages.”

Panmure’s Chen said the post credit crunch world had stymied consumers: “Before the credit crunch, we thought that having negative cashflows was not such a problem. Households could have refinanced with another credit card, or a mortgage at 130% loan-to-value in a rising house price environment. No longer.”

Chen is concerned about borrowers who have failed to benefit from record low interest rates. Many of those who bought a house at the peak of the market with a small deposit now find themselves unable to get a new mortgage, trapping them on high interest rates.

Mortgage arrears are already starting to soar. The latest figures provided by Mound, one of the securitisation trusts that was used to sell HBOS mortgages to the financial markets, shows that about 7% of customers are more than 30 days behind with payments and 4% are 90 days or more behind their repayment schedule.

Arturo de Frias, banking analyst at Evolution Securities, said negative equity was starting to become a problem. He warned that as many as 10% of all mortgages could default and in each case the banks could lose 30% of their money. That would equate to bad debts of £40 billion on UK mortgages — £3 billion more than the government pumped into RBS and Lloyds last October in the first stage of the bank bailouts.

HOW the banks deal with these problems remains unclear. Very few of the callers to the Consumer Credit Counselling Service are being threatened with repossession, even if they have defaulted on mortgages. Where possession orders have been served, they are mostly being postponed by the banks. The Council of Mortgage Lenders recently cut its estimate of the number of repossessions this year from 75,000 to 65,000.

“The banks are quite understanding, so long as they know what’s going on,” said Coleman. “This time last year they were moving for a repossession as soon as a mortgage went three months overdue. Now they’re leaving people in their house as they can’t even sell the properties at auction.

“They seem to take the view that the house will be better looked-after and more likely to get a decent price at a future auction if they leave people in it. So you have a number of families who now feel that they are sitting on a timebomb, wondering when they will be kicked out on the streets.”

It is not all bad news. Figures last week from Nationwide building society showed a 1.3% increase in house prices last month, the third rise in as many months. They have now gone up by 4.4% since February.

There are powerful forces operating in both directions for consumers. While earnings growth has been squeezed by the recession, falling interest rates have brought a bonanza for many households.

The latest official figures show average earnings, including bonuses, rising by 2.3% a year, significantly weaker than in recent years. Earnings are staying ahead of both consumer price inflation, at 1.8%, and the retail prices index, which includes mortgage rates and is down by 1.6% in the past year. Set against that, real earnings are growing by about 4%.

This may explain why retail spending is holding up. Figures from the John Lewis Partnership on Friday show department store sales in the week to July 25 up 6.3% on the year.

Howard Archer, chief European economist at IHS Global Insight, said: “With sharply reduced mortgage payments, lower utility bills and generally increased discounting boosting purchasing power, many people are currently more able and willing to step up their discretionary spending.” The CBI’s latest survey of the distributive trades also suggested spending was stronger than predicted.

While households and businesses have been repairing balance sheets by “deleveraging”, the evidence is that companies have been cutting back more aggressively. Bank lending to companies has dropped 1.2% over the past year and, while the saving ratio among households has risen, it has yet to hit 10% as in previous recessions.

With so much of the banking sector supported by the government, bad debts now have a wider impact than in the past.On Friday, Fitch, the credit rating agency, issued a report on the UK economy. It confirmed Britain’s sovereign debt rating as AAA, with a stable outlook, but it also warned of the costs of bailing out the banks.

The upfront costs were likely to be £145 billion, it said, coming down to a net figure of £40 billion, 3% of gross domestic product, over time.

“Stabilising the banking system has been very expensive and contributed to the rapid deterioration in UK public finances,” said David Riley at Fitch. “However, it is likely that the Treasury will ultimately recover most of the costs by imposing levies on the financial services sector and selling its holdings in Lloyds and RBS.

“Although the net fiscal cost of support for the banking sector over the long run is likely to be moderate, the repayment of government loans and sale of shareholdings in RBS and Lloyds will be spread over several years,” he added.

Taxpayers as well as shareholders will be paying close attention as we begin the banks’ reporting season.

Cost of borrowing leaps

Faced with having to pay a raft of extra fees on top of a 9.9% interest rate on his £5,000 overdraft with NatWest, Peter Reeve, a quantity surveyor with Estimating Surveying Services in Bedford, finally lost patience. A few weeks ago he decided to pay off the lot using credit cards.

“I had just had enough,” he said. “They were crippling me with interest rates, maintenance fees, service charges and arrangement fees. It was unfair and unreasonable.”

The good news is that the banks are finally starting to lend money to small businesses again.

The bad news is that the interest charged on lending has soared. To add to the misery, every new loan is accompanied by numerous other unexpected charges, making the total cost of borrowing extremely high.

Stephen Alambritis, spokesman for the Federation of Small Businesses, said: “Banks have begun to lend money to small businesses but they are coupling this with a hike in charges. Whereas the cost would previously have been 0.5% of the loan, for example, now it could be 2%. They are also reviewing small-business accounts every other month rather than twice a year, and charging £300 each time.

“We are seeing banks charge an arrangement fee, a facilitation fee, an audit fee and a review fee, over and above the interest on the loan. It means that small businesses are really put under pressure.”

He added: “The banks are trying to get as much money in as possible so they can pay off the government and cut the ties with them.”

Phil McCabe, of the Forum of Private Business, said: “Small businesses are angry, frustrated and upset. Our research shows that the cost of lending is increasingly restrictive, as the banks are charging all sorts of unexpected fees for arranging lending plus interest rates that are way above base.

“There has been a small increase in the availability of lending but that has been more than offset by the increased cost and it is having an impact on cashflow.” (Iain Dey, David Smith and Rachel Bridge, The Sunday Times)

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