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In the tidal wave of comment that followed yesterday's Budget, the trade association for insolvency specialists, R3, struck a particularly relevant note, albeit on one of the Budget's more obscure provisions.
In 1900, it said, 3571 individuals went bankrupt. In 2006 the number was 52,000 - and that, of course, was when times were good and lenders were still willing to indulge. In the same period, the amount of debt attributable to companies in the insolvency market had shrunk significantly. The message was clear. These days it is individuals rather than companies that go bust.
It is likely to get much worse. A meeting of the Insolvency Practitioners Association in the City last night should have been an upbeat occasion on the basis that bad times are just around the corner. But the view from the front was that they are already upon us.
In the words of one member, the phones started ringing at Christmas and they have not stopped. Indeed, he said, the real level of personal bankruptcy is far higher than official Government figures shows because people and their lenders are still in denial.
There are large numbers of cases where people have stopped paying their mortgages but they are not being foreclosed upon because the lenders know there is nowhere near enough security for the loan and do not want to have to recognise the loss, he claimed.
Shades of Northern Rock, which had a reputation for not co-operating with Individual Voluntary Arrangements - a kind of bankruptcy by instalments - because it did not want to have to admit its loans were going sour. But the practice has apparently spread. Lenders prefer a kind of phoney war, full of empty threats and gestures but always stopping short of confronting reality.
But reality will catch up with them soon enough. What sets this credit crunch apart is that the distress is in the personal sector, not the corporate. Companies outside private-equity are quite robust and well financed. Individuals, in contrast, have been on a 10-year debt binge where they have treated their homes like automated cash machines, and now an uncomfortably large number can keep afloat no longer.
How the Government will cope with this as the problem snowballs is a moot point. Whether it is compatible with its growth forecast of 2.75% is highly unlikely.
THE decision by the US Federal Reserve to accept mortgage-backed securities as collateral for loans to the banking system does rather put Northern Rock in perspective.
Cut through the jargon, and what the Fed has agreed to do is take on to its own books a load of mortgage assets that commercial banks were unable to sell at face value to anyone else. This may be because those assets were not worth face value, or it may be that they are probably OK but there is such distrust around no one could be sure. Only the government has deep enough pockets to take the chance.
That is essentially the Northern Rock problem - the assets are said to be sound and of good quality, but no private organisation was prepared to take the chance so in the end only the Government was prepared to lend the organisation any money.
PEOPLE compiling the figures for the US mortgage meltdown certainly know how to frighten. America has an estimated 46 million residential mortgages and, in the final quarter of last year, 2% of them had been foreclosed upon and almost 6% - which equates to more than a quarter of a million homes - were behind on the payments.
However, those figures apply to all homes. Looking only at subprime mortgages the figures were very much worse, with some 13% already in foreclosure and 20% past their due date. And this, of course, is before the majority come up for resetting at higher rates of interest when their initial, enticingly low teaser rates run out.
Going forward, American economists widely predict that house prices, which are already down an estimated 10%, could fall by another fifth. If this happens, they further predict that as many as 20 million homeowners will have negative equity - meaning the loan exceeds the house value - which of course makes it financially, if not morally, rational for them to default and send back the keys.
But the scary thing is the size of this potential default. A figure of 20 million with negative equity would account for more than two out of every five US homeowners.
Reader views (1)
Antony, you really know how to scare us!! Then again, to ignore the facts will do us no good whatsoever. Excellent articles, as ever.
- Vij, London, 13/03/2008 12:41
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