Mortgage Withdrawals Driving UK Consumer Spending, Also

Tuesday, September 25, 2007 | 07:12 AM

Mew_uk_20070923We have, for several years now, highlighted the significance of Mortgage Equity Withdrawal (MEW) in the U.S. as a major source of consumer spending.

As MEW slows, so too will consumer spending.

It turns out that this phenomena is not limited to the U.S.: In Great Britain, where nearly all mortgages are adjustable APRs, MEW has been a major source of fuel for their consumer spending.

From Monday's WSJ:

"In the past decade, U.K. consumers have become more dependent on borrowed money, both to buy homes and to finance spending. As of July, total mortgage debt in the U.K. had reached £1.1 trillion ($2.2 trillion), more than double the level of 10 years earlier and equivalent to more than 80% of annual gross domestic product. In the first quarter of this year, U.K. homeowners tapped their home equity for about £13.2 billion, or 6.1% of disposable income, an indication of how much rising home prices have been raising consumer spending, which makes up about two-thirds of the U.K. economy."

Of course, this only gets discussed once there is some sort of a disaster -- and in the UK, that disaster is Northern Rock:

"Perhaps no company symbolizes the borrowing boom better than Northern Rock. In the late 1990s, the company became a pioneer in the securitization of U.K. mortgage loans, packaging thousands of loans into pools and selling the cash flows as securities to investors in the U.S. and Asia.

By tapping capital markets rather than relying solely on typical deposits, Northern Rock was able to expand at great speed. By June, it had about £87 billion in mortgage loans outstanding and had accounted for almost a fifth of new mortgage loans made in the first half. According to brokers, Northern Rock gained market share in part by taking risks -- allowing home buyers, for example, to get loans covering as much as 90% of the purchase price.

Their mortgages "were prime, but they were operating at the outer limit of it," said Howard Cook, a partner at Talbot Insurance Services, an independent financial adviser in Cumbria, in northwestern England. A Northern Rock spokesman said the credit quality of the company's loans was solid, and that the percentage of loans in arrears was well below the industry average."

There you have it: Sub-prime mortgagees, high LTV, below industry average loan quality. Gee, how could that strategy ever go wrong?


Northern Rock May Point to U.K. Crunch
WSJ, September 24, 2007; Page A2

Tuesday, September 25, 2007 | 07:12 AM | Permalink | Comments (10) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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It went wrong because of greed and the profit motive. "Let's make tons of money now, because we can, and dam the future stability of our company, our country and our world!"

Posted by: Justin | Sep 25, 2007 7:41:11 AM

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