The Great Housing Bust in Britain

By England, Robert Stowe | Mortgage Banking, March 1993 | Go to article overview

The Great Housing Bust in Britain


England, Robert Stowe, Mortgage Banking


The once promising British mortgage-backed securities market has hit upon hard times. Disastrous monetary policy, high unemployment and plummeting home prices have dashed hopes that this market could someday rival America's own.

WHILE BRITAIN'S GUTTER TABLOID PRESS ALL but devoured the flesh of the royal family during what Queen Elizabeth called her "annus horribilis," or horrible year of 1992, little public notice was paid to the equally dour mood of the nation. Indeed, all of Britain seemed to have suffered an "annus horribilis" last year, as the economy, already in recession for three years, feel to its lowest ebb since the Great Depression, hitting the housing sector the hardest. It seemed at times that the last vestiges of optimism that former Prime Minister Margaret Thatcher had brought back to Britain had vanished.

The bleak mood of the nation reached its nadir on Black Wednesday last September 16. That's the day the government of Prime Minister John Major finally took steps to unhitch Britain from Europe's doomed unity wagon by removing the pound sterling from the Exchange Rate Mechanism. That mechanism ties all the major Western European currencies to the ever-strong Deutsche mark and allows them to trade within a narrow band. The political mythology of European union dictates that other countries are supposed to step in and support a weak currency when it falls to the lower end of its trading range. But, Germany's Bundesbank, intent on keeping inflation in check in the face of mounting budget deficits to bail out eastern Germany, made little effort to halt the sliding pound. Instead, all the support had to come from the Bank of England, which had no choice but to keep raising interest rates just to keep its currency within its trading range.

After Black Wednesday, the Bank of England canceled its plans to raise its base rate to 15 percent. It began to crash interest rates, dropping the base rate to 7 percent by mid-November. In January, Major took charge of the economy himself and lowered rates a full point, to 6 percent, with rumors of another full-point drop to come in March. Insiders predict Chancellor of the Exchequer Norman Lamont will be moved to another position in a cabinet shuffle expected this summer.

British mortgage rates are now the lowest in nearly two decades. The beleaguered housing sector hopes that the only way to go is up. "We think we're at the turning point," says Adrian Coles of the Building Societies Association, whose members hold nearly two-thirds of all mortgages.

After four bad years, the longest and deepest housing downturn since World War II has pummeled house prices so badly that 1.2 million British households, 12 percent of those with mortgages, have negative equity. Repossessions are 13 times their historic averages and an army of 3 million unemployed haunts every mortgage holder and potential first-time homebuyer.

The blow to mortgage originations funded by mortgage-backed securities has been severe. That market, which financed as much as 15 percent of all new mortgages at its peak in the late 1980s, collapsed entirely last year. Most centralized lenders ceased originations and have no idea when they will resume. The centralized lenders, which receive mortgage applications entirely from third parties and have no retail offices, rely almost entirely on securitization to fund the mortgages they underwrite. There have been no new issues for more than half a year. There are some bright spots, however. One major centralized mortgage lender, Household Mortgage Corporation (HMC), and a smaller one, First Mortgage Securities (FMS), have survived unscathed the Darwinian market forces that have rocked the housing sector.

Robert Weir, head of Treasury operations at HMC, is upbeat about the future. As far as he is concerned, the revival of the market for mortgage-backed securities has already begun. "We're through the recession. We're seeing increasing activity in housing," he says. …

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