The extent of sub-prime lending in Britain could be a lot worse than is commonly assumed because a large number of homeowners have more than one loan secured on their property, according to the property research group UKValuation.
As a result, true loan-to-value (LTV) ratios are often higher than is usually thought, which, in turn, could lead to a big jump in mortgage defaults this year, says Mark Witherspoon, the company’s chief executive. The problem is, he says, that many lenders price the risk of lending on a property in ignorance of other charges that may be on it. So if a bank lends 75% of a property’s value, the homeowner may then take additional secured loans with other lenders and therefore face a true LTV of, say, 110%, making him or her much more likely to default.
“The loan will behave like a 110% loan because the borrower knows his true level of debt. He will read about slowing house prices and is much more likely to default on the mortgage payments than Mr 75%,” said Witherspoon, a former head of the property research firm Hometrack. “Until all lenders start to record 2nd, 3rd and 4th charges properly, this will be a major hidden risk in the UK mortgage market.”
UKValuation has been commissioned by a group of mortgage lenders to try to establish the “true” LTVs on the properties they have lent against in recent years.
Particularly vulnerable, says Witherspoon, could be people who have bought flats on a high LTV in the past couple of years. Flat prices have performed much less strongly than, for example, detached houses and are now falling.
Some economists and the International Monetary Fund believe that British house prices are overvalued by as much as 30% and could fall sharply
Very interesting post