Submitted by Edward Harrison of Credit Writedowns.
The Nationwide, the world’s largest building society, is now bringing back the dreaded 125% mortgage. While the lender claims these mortgages are a “niche product” designed for customers of Nationwide in negative equity, the Financial Services Authority (FSA) is looking to ban this type of lending.
It will only be available to existing customers in negative equity who want to move house.
Negative equity means that the value of someone’s home is less than the amount they owe on their mortgage.
Nationwide said the deal was a very "niche offer" and that not everyone in negative equity would qualify.
The Financial Services Authority is considering limiting mortgage loans to 100% of a property’s value.
‘No more risk’
The Nationwide only offers new customers mortgages worth 85% of the value of the home they want to buy.
Under its new arrangement, borrowers would take out a loan for 95% of the value of their new house at a fixed rate of 6.73% for three years or 7.48% for five years.
They would then be able to add on the negative equity from their old home, up to another 30% of the value of the new property, at a higher fixed rate of 7.23% for three years or 7.98% for five years.
Now, this is a different product than the one being sponsored by the U.S. government ( see posts on that here and here). In the U.S., the 125% mortgage only applies to the refinancing of mortgages of existing properties. Here, the Nationwide is offering to fund 95% of the new house purchase, plus up to 30% negative equity from a previous residence.
While I am sceptical about the rationale for this product, it is quite innovative. First, the negative equity portion carries a higher rate than the 95% mortgage. Moreover, loan exposure for Nationwide probably won’t increase because these deals are for existing customers. And, Nationwide seems to have found a way to get more house transactions in a climate where prices have been declining.
To my mind, the 125% product offered by this building society shows how innovative the financial services industry can be in any investing or economic climate. However, products like these operate on the fringe of what should be considered prudent. I see it as further evidence that the financial services industry needs strong oversight to prevent lenders from taking on too much risk and creating the kind of financial crises we have experienced.
Nationwide offers 125pc mortgage to home owners trapped in negative equity – The Telegraph
Nationwide brings back 125% mortgage – The Guardian
FWIW, I don't think the FSA is going to cap LTVs. I've been following their public statements on this quite closely and it's pretty clear they're leaning toward a more flexible affordability measure, like a debt to income ratio, probably incorporating other indebtedness. The government could force them to, of course, but the white paper this week quite deliberately shied away from doing so.
If independently wealthy equates to increased freedom doesn't overwhelming debt make you a slave? Isn't ironic that the land of the free is producing slaves at record pace?
This is just a way to allow people to continue to trade up to bigger houses in a down market, when they should be scaling back to smaller more affordable houses.
@Ginger – LTV and DTI measure two different things. DTI measures capacity whereas LTV measures capital/collateral. Both are equally important credit metrics.
RTD, very much on point! Nationwide wants that up-trade because the whole housing edifice depends on it. If people can't trade up, then the whole chain of transactions doesn't happen.
Give credit where credit is due. These guys are definitely thinking outside the box.
On Credit Writedowns, I posted a press release from Nationwide. Apparently, they are getting a lot of flack about this product.
I always thought that a "good loan" was defined as having two ways out.
One would be that the borrower pays the note from their own cash flow. The other is when the collateral is seized and sold to satisfy the loan.
With a 125% loan there is certainly no two ways out. It is doubtful that there is one way out given the high default rate these loans will have.
So how is Nationwide going to 'book' these loans. Money good?? I can't imagine that. They do not meet the criteria of a good loan.
We are going the wrong way on this problem. We are just creating more bad loans.
I do not think the Japanese banks did this in the 90's. They did make 100% loans, but not 125%. May I conclude that we are gong down Japan's road and therefore this will take a decade or more to fix??
"LTV and DTI measure two different things. DTI measures capacity whereas LTV measures capital/collateral"
Um, I know that. That's why I contrasted the two and said the FSA prefers one over the other.