The Bank of England’s chief economist has warned that the effect of the credit crunch on banks may only be the tip of the iceberg.
Who didn’t see this coming?
In the early days of February 2007, we saw the beginnings of a sub-prime meltdown that would soon wreck the future of housing, easy credit, and people who bought homes they couldn’t afford. Now, months later, homebuilders and lenders are knee-deep in debt. And there’s no real chance for a housing turnaround until 2010, at the earliest.
But just as the U.S. has struggled for some control over sub-prime, Britain had to get aggressive or risk a tumultuous economic future. In the UK, more than 90% of all mortgages are adjustable-rate or floating-rate mortgages. More than 1.5 million homeowners are considered sub-prime, and another four million are seen as high risk because of imperfect credit histories.
In September 2007, UK ARM rates sat at 5.75%. Rates are now at 6% two months later. And, as we’ve seen in the U.S., the ARM resets are having a negative effect on British consumers, sending the housing market into a U.S.-type tailspin.
On top of mortgage debt, British consumers owe $2.7 trillion on credit cards. Debt per capita is at a higher level even than for U.S. households. The Brits’ household debt equals 166% of GDP, as compared with 127% in the U.S. And recent research suggests that one in four people are either struggling with debt or feel that their debt is unmanageable.
It’s a trend that is continuing to wreak havoc on banks that have already written off $18 billion in bad consumer debt.
Who didn’t see this coming?
This is nothing new. This news has been around for a few months now. It was the sole reason I shorted shares of Northern Rock (NRK.L) at about 700, to watch it crash and burn under 120.
Alliance & Leicester (AL.L), which reportedly focuses on credit card, housing and auto credit, fell from 900 to 639. Bradford & Bingley (BB.L), a financial services company that focuses on mortgages and savings products, including self-certification loans, plummeted from 360 to less than 300.
Really, who didn’t see this coming given the rot in the housing market?
