The U.K.’s biggest mortgage lender is wanting its money back.
Certainly that’s one possible message of the ads that appeared in the U.K. papers this morning from Lloyds TSB, a unit of Lloyds banking Group PLC, which has about a quarter of the U.K. mortgages on its books.
Lloyds is advertising that “Now’s a great time to reduce how much you owe on your mortgage” because of low interest rates. To help nudge homebuyers along it’s doubling the size of mortgage overpayments that can be made without incurring penalties on variable rate mortgages.
This is certainly a reversal of message. A mortgage lender advertising the benefits of early repayment is a like a toothpaste maker advertising the benefits of plaque.
And the timing is curious. Almost exactly one year ago, Lloyds pledged as part of a government bailout package to increase gross lending to homebuyers by GBP3 billion in the following 12 months. The government was holding the bank’s arm behind its back to force it to increase lending amid fears that a shortage of mortgage finance would create a downward spiral in housing prices.
Well, fast-forward to today and Lloyds has pretty much lent the GBP3 billion as promised. So is it now trying to shrink its balance sheet and suck at least some of that GBP3 billion back in, which may be within the rules but is hardly within the spirit of the bailout?
Lloyds bristles at the suggestion. A spokeswoman said that “To be clear, this is not about reducing our balance sheet but about providing the right advice to customers”, adding that “It would be wildly misleading to present this in any other way.”
For sure, with interest rates low plenty of homeowners are repaying early. A good proportion of U.K. home loans are at variable rates and repayments have fallen – Lloyds reckons that mortgage payments at the end of last year represented 32% of homeowners’ post-tax earnings , a big drop from the 47% at the end of 2008. Lloyds’ own survey indicates that one in four homeowners is already paying their lender more than they need to.
But what if other lenders follow Lloyds’ lead? If overpayment of mortgages becomes widespread this will depress consumer spending. It’s an acceleration of the Great Deleveraging, which may be a good thing conceptually but in the short term will depress other consumer spending and could help enfeeble the U.K.’s weak economic recovery.
And while Lloyds says it’s not trying to shrink its mortgage book, if the U.K. does have a double-dip recession all that extra cash that homeowners have paid back could come in very handy.
The U.K.’s biggest mortgage lender is wanting its money back.
Certainly that’s one possible message of the ads that appeared in the U.K. papers this morning from Lloyds TSB, a unit of Lloyds banking Group PLC, which has about a quarter of the U.K. mortgages on its books.
Lloyds is advertising that “Now’s a great time to reduce how much you owe on your mortgage” because of low interest rates. To help nudge homebuyers along it’s doubling the size of mortgage overpayments that can be made without incurring penalties on variable rate mortgages.
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Here’s a staggering statistic mentioned in Fannie Mae’s just released financial results – nearly 1 out of every four residential properties in the U.S. (24%) today has negative equity because the value of the homes are less than the mortgages against them. What that likely means is any rebound in housing prices will be slow at best. If homeowners with negative equity wal away from their obligations, forced home sales will tilt the supply-demand balance of homes in favor of supply, as in too much of it. Thus the continued pressure on housing prices.
The U.S. Treasury just pumped another $3.79 billion into GMAC Financial, the struggling finance company that is now majority owned by you and me. GMAC got itself into a financial pickle by getting too heavily involved in the mortgage business and in particular, the subprime mortgage business.
