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British banks face a new mauling from mortgage defaults by US middle classes
Gideon Spanier6 Feb 2009
After subprime comes Alt-A. Fears are growing that British and European banks will be hit by a second wave of huge losses, caused by defaults in the US on what are known as Alternative-A mortgages.
Ranking between prime and subprime, Alt-A loans were taken out by the middle classes. As the recession deepens and more white-collar workers lose their jobs, the number of repossessions in more well-heeled areas has soared. British banks Lloyds, Barclays and Royal Bank of Scotland have total Alt-A exposure of at least £12.5billion.
Credit rating agency Moody's has set alarm bells ringing by downgrading the value of Alt-A debt because it has seen an "unprecedented" number of borrowers falling behind with repayments, and losses increasing.
David Watts at London research firm CreditSights, said: "The performance of Alt-A loans is clearly deteriorating rapidly, and we believe that 2009 will see such mortgages worsen further."
Watts estimates that $600billion (£407billion) of Alt-A debt is outstanding and $150billion may need to be written off. British banks have already written down some of the losses.
Analysts had regarded Alt-A as safer than subprime because borrowers had better credit histories. But they were often encouraged to borrow more.
A Moody's report warned: "A sizeable proportion of transactions backed by these Alt-A mortgages have performed similarly to subprime mortgage securitisations.
"The loans backing 2006 and 2007 Alt-A securitisations have shown substantial increases in serious delinquencies and decreases in prepayment rates that are unprecedented for the asset class."
Sandy Chen at Panmure Gordon said: "The problem with Alt-A has been buried by all the other bad news we've had in the last few months."
Lloyds is the most exposed of the British banks with more than £7billion of Alt-A. Its HBOS subsidiary has £6.75billion while the Lloyds TSB arm has £619million.
Barclays' latest interims say it has exposure of £3.7billion. Broker RBS Hoare Govett last week warned that Barclays' "large Alt-A portfolio is perceived to be inadequately written down".
RBS has £1.59 billion of Alt-A but HSBC and Standard Chartered are thought to have relatively little direct exposure.
British banks' problems are dwarfed by those of some of their European counterparts. ING has a €27.7billion (£24billion) portfolio of Alt-A. UBS held as much as $26.6billion, but is understood to have managed to offload much of the paper at a discount.
Reader views (8)
In an answer to 'Tom, Oxford, England'
Most american mortgages backed by fannie Mae and Freddie Mac are known as 'non-recourse' mortgages. This means that the lender can come after the house and repossess but cannot pursue the borrower for any shortfall if the house is not worth the mortgaged amount. This has allowed many people to just walk away from the debt.
Many Alt-A mortgages are not backed by Fannie and Freddie, and are recourse type mortgages so when they go bad the debt can be pursued even after repossession if the borrower has walked and there is negative equity. These are now going bad at an increasing rate causing bankruptcies to soar. The Alt-A problem is even bigger than sub-prime so our banks (and hence, government and taxpayers who are now liable) have seen nothing yet!
- Chris Simmonds, Herne Bay, Kent, 07/02/2009 23:55
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Is there something about american law that makes it easier for people to walk away from their commitments than in the UK ? The law should tightened up if it is.
- Tom, Oxford, England, 07/02/2009 09:00
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next act of this economic crisis. these banks have been too negligent. it is a lesson to all of these banks. banks started operating like casinos. they had a narrow and one track vision of the future with no thoughts given over 'what if?' situation. They need to take their lumps and start fresh.
- Kanan Krishnan, mountain view, 07/02/2009 08:36
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I can answer Brian's question on repossession. In my experience, with a failing company in the UK, British banks will not agree to let local or industry experts to contract with them to get back maybe 50p on the pound. They would rather go to one of the major accounting firms and have a huge group of invoice fodder bag carriers hang around in the company until the cash has been used up and then maybe hand back 5p in the pound to the bank. It is a version of the "you don't get fired for buying IBM" attitude. I am sure that similar thinking goes into the "job's worth" kind of attitude, when people trying hard to sort out a situation are turfed out so the bank can get half of what it could have received.
A major scam in the last recession was for agents to advertise the property in some local paper or the Horse and Hound, which satisfied the required procedures and then take offers from a couple of insiders. One will have passed over an envelope with 1,000 in it. The high bid disappears just before the close and the only offer left is the very low bidder. Such a shame, but that's all we could get. The owner's equity is totally blown. The bank gets back half what they wanted, but the staff in the bank just adjust the ledger and all is fine.
Lots of people made some big money last time around with this scam.
I'm afraid that banks employee don't care as long as they can tidy up the books and draw a line under things. It's not their money after all.
- Coylum, vancouver, Canada, 07/02/2009 04:54
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Why do banks have this compulsion to re-posses at the drop of a hat, surely a more long term approach would benefit all, even if after the full term of the loan has expired the property can still be sold and any equity used to pay of the loan with the interest, but re-possesing in a depressed market is just throwing good money after bad.
- Brian, Wiltshire, 06/02/2009 14:44
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Why aren't these losses for US mortgages underwritten by the Americans or put in their soon to be 'toxic bank'? Why do we have to stand the loss? As I see it, they have caused it all by having a stupid system where you can walk away from a morgage without penalty. They call it jingle mail, ie keys in the post. It doesn't happen over here as you are chased for the arrears.
- Crm, essex, 06/02/2009 13:49
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Is it me, or do others get the feeling that the plug has been just been yanked from dump-UK bath tub?
- Ted, London, 06/02/2009 11:09
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To be followed by the UK Middle Classes in 6 to 12 months as redundancies take hold.
- Dave Davies, Basingstoke, 06/02/2009 10:08
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