Skipton Changes The Rules

The Skipton Building Society has shown its true colours by announcing plans to raise its standard variable loan rate from 3.5% to 4.95% effective from 1 March.

Doubtless Skipton's 100,000 borrowers, who had up until now been guaranteed that the variable rate would not rise while Bank of England base rate stayed at 0.5%, will be crying "foul".

Skipton doesn't care, because it refers all such "wingers" to the small print in it loans' agreements.

What does the small print say?

The magic phrase (that can be used by any bank/lender to change to rules as they go along) "exceptional circumstances".

Skipton claim that they are suffering from competition, such as that provided by National Savings & Investments (NS&I).

A lousy excuse from a lousy industry.

The financial services industry in Britain truly stinks, and should be thoroughly disinfected. No one should trust any financial institution that they have dealings with.

This all but makes the Bank of England's base rate irrelevant.

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Eager To Repossess

The Financial Services Authority (FSA) has fined GMAC-RFC, a mortgage lender, £2.8M for mistreating customers who fell into arrears.

GMAC-RFC also has to repay £7.7M, plus interest, to 46,000 borrowers.

The FSA said that the company levied unfair charges on borrowers who fell into arrears with their repayments, and was too eager to repossess their customers' homes.

GMAC-RFC, having been fined, is quoted by the BBC:

"In hindsight, we fully accept that for certain fees our estimates of the costs were not proportionate to the additional administration actually required.

We will be writing to customers who incurred these specific charges when in arrears and will re credit the charges plus interest."

So that's alright then!

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A Gnat's Piss On The Dung Heap of Debt

The government, in attempt to shut the stable door long after the horse has bolted, has come up with some proposals theoretically designed to force credit card companies to help customers reduce their debt.

Card companies will be forced to allow customers to pay off their most expensive debts first, rather than pay off the cheaper debts and allow charges to accrue for higher interest debt.

The minimum monthly repayment level would also be increased, to encourage people to pay off their debt faster.

The government said:

"Around one-third of people who don't pay off their credit card bill in full each month make only the minimum repayment. This can mean consumers take decades to pay off the debt."

Indeed so, but this is most likely due to the fact that they cannot afford to pay off much more than the minimum.

By forcing those already in debt to pay a greater amount, the government is in danger of pushing many hard pressed families over the "financial edge".

The government also proposes to ban the practice of credit card companies automatically increasing credit limits, without specific authorisation from their customers.

Will they also ban card companies from arbitrarily cutting credit limits on those card holders with good credit records, who clear their debts each month?

The government also wants tighter rules imposed on increasing the interest rate on existing debt without "proper explanation".

That will not make not one jot of difference to this rip off practices employed by card companies. They will continue to increase rates based on the "explanation" that they are finding their margins squeezed by "difficult trading conditions".

Until there is a thorough independent investigation of the make up/rationale of companies' charges, and the quasi "price fixing" scheme of arrangement wrt this practice operated by the companies, they will continue to charge what they like, because they know that they can get away with it.

The proposals are open to consultation until January 19 2010.

This particular horse has long since bolted and the British consumer is hopelessly mired in debt, these proposals are little more than a "gnat's piss" on the dung heap of debt that has been created by the Faustian collusion between greedy consumers and lenders.

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New Mortgage Rules

The FSA intends to firmly slam the door after the horse has bolted on "risky" lending, and is advocating new rules that will ban self-certified mortgages and impose rigorous new checks on homebuyers applying for mortgages.

Seemingly borrowers may even be asked how much they spend on booze and shoes (how does the FSA think that the banks can check up on that?).

Hector Sants, CEO of the Financial Services Authority (FSA), said that the FSA was going to "get rid of the irresponsible practices that put banks and consumers at risk".

All very well. However, the FSA has been in existence for well over a decade and these "irresponsible" practices have been well reported for many years.

Why, only now, do they seek to reform these practices?

The FSA will make banks and other lenders liable for loans that cannot be repaid.

The trouble is that the economy, during Brown's "no return to boom and bust" years, has been built up on lending made to eg self employed, those with risky credit ratings etc etc. To take lending practices back to the 70's will inevitably take the economy backwards as well.

Like it or not, the genie is out of the bottle and will be very difficult to put it back in without causing further damage to the economy.

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Grill Party

Alistair Darling will be holding a "grill party" today, to which the CEOs of Britain's leading banks are invited.

Darling will use the "grill party" as an opportunity to express government "concerns" over the lamentable level of bank lending that is holding back the possibility of pulling out of the recession.

Lloyds Banking, RBS, HSBC and Barclays will all attend the meeting.

Darling is quoted:

"That is why we will be going through with each individual bank asking them why is it, at a time when the cost of borrowing is coming down, it would appear that the cost to small business appears to have gone up?

We're playing our part, the banks have got to understand that the public will not understand it if they do not play their part to the full."

Quite what Darling thinks he will be able to do to persuade the banks to lend more is not clear.

Additionally, as Vince Cable notes, why has it taken Darling this long to realise that there is still a problem wrt bank lending?

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A Spoonful of Sugar

The appointment of Sir Alan (soon to be Lord) Sugar as the government's "business champion" has received much media attention.

Sugar plans to lead a roadshow of bankers around the country, in an effort to get them lending to small and medium-sized enterprises.

All very well, but given that the government which actually owns some of the banks has not managed to persuade them to increase lending, why should a road show (televised perhaps?) make any difference?

This is more of a publicity stunt by our ever more desperate Prime Minister, rather than a serious business initiative.

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National Lending Scheme

Alistair Darling, exasperated by the banks' refusal to resume lending, is (according to The Times) considering a national lending scheme.

Under the scheme the government would guarantee new lending to businesses, on the condition that it is genuine new lending and not an attempt by the banks to reschedule old loans/debt.

Ironically figures from the Office for National Statistics (ONS) show an unexpected rise of 1.5% in retail sales in the UK last month. Needless to say, the veracity of the figures are being called into question.

Like it or not, unless there are further pro active measures taken by the government and Bank of England, the recession will worsen significantly. Three key measures should be taken instantaneously:

1 Cut interest rates to zero.

2 Initiate a national lending scheme.

3 Initiate a policy of quantitative easing (akin to dropping money from a helicopter), whereby the Bank of England buys debt using government bonds.

These measures will draw a firm line under the rapidly failing economy, and provide the bedrock from which to grow again.

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The Engine of The Economy Splutters To A Halt

The engine of the British economy, the housing market, looks set to splutter to a halt. Figures released by the Royal Institution of Chartered Surveyors (RICS) indicate that house price declines in June stayed close to the most widespread decline since RICs began to measure the property market in 1978.

The number of residential property agents and surveyors saying prices fell exceeded those reporting gains by 88%, in May it was 92%.

To add to the market's woes, RICS state that property sales have fallen to the lowest on record. Additionally mortgage approvals fell to the lowest in at least nine years in May, many buyers are finding themselves frozen out by tight lending conditions.

The Bank of England, as it considers what to do with interest rates and easing liquidity, would do well to bear in mind that the housing market is the engine of the economy.

Kill that off, and the economy dies with it.

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Bank of England Cuts Rates

The Bank of England has cut rates by 0.25% today.

Needless to say this will not be passed on to those in debt, as lenders are in fact raising their rates in line with LIBOR.

The phrase "Pushing a piece of string" comes to mind!

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Northern Rock

Bloomberg notes the following:

"The cost of overnight borrowing in pounds rose the most since June as the bailout of U.K. lender Northern Rock Plc stoked concern other home-loan providers will be forced to seek emergency funding.

The overnight rate banks charge to lend pounds soared 60 basis points to 6.47 percent today, the highest in more than a month, according to the British Bankers' Association. The three- month rate fell 7 basis points to 6.75 percent, the BBA said."

Northern Rock's share price is currently down 34% on the day.

The time has come for the Bank of England to:

1 Lower interest rates

2 Knock some heads together in the City, and ensure that the self imposed moratorium by banks on interbank lending is lifted

Should the Bank of England fail to loosen interbank liquidity, other banks will start to wobble. Bloomberg notes that Bradford & Bingley Plc and Alliance & Leicester Plc also rely more on financial markets than customer deposits to fund mortgages.

It is time for the Bank of England to get off the fence.

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Northern Rock

Monday morning is proving to be a "grey day" for shareholders in Northern Rock, as they saw the share price plunge by 29% in early trading to 311 pence.

Friday saw the price fall by 31%, as the Bank of England agreed an emergency lending facility for Northern Rock.

Whilst it is clearly bad news for shareholders and those wishing to take a mortgage out with Northern Rock, the fall in shareprice and liquidity issue should not worry savers with money sitting in Northern Rock accounts.

The fact that the Bank of England has agreed to cover Northern Rock's liquidity means that savers will not lose their money.

The reality will be as follows:

1 Northern Rock will be taken over at a bargain basement price

2 The mortgage market, and hence housing market, will be adversely impacted.

That being said, people are still queuing to withdraw their savings from Northern Rock, why?

1 The herd instinct of fear

2 The sadly British lack of understanding of how the financial markets work

3 A complete lack of trust in the financial services industry.

The blame for the latter can be laid fairly and squarely at the door of the financial services industry, which has foisted on the hapless British public a plague of disasters including:

-The endowment crisis
-The pensions crisis
-Excess bank charges
-Irresponsible lending
-Conspicuous greed (eg mind boggling bonus payments to senior bank executives)
-Offshore call centres
-Impersonal banking etc

Who can blame the public for no longer trusting the financial services industry?

The financial services industry will now have to work very hard indeed to regain the public's trust, I wonder if they have realise quite how hard they will have to work and whether they will ever regain the public's trust?

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Another Silver Lining

Further to my article yesterday, about lawyers benefiting from the current "credit crunch" caused by the US sub prime fiasco.

There is another silver lining, this time for those holding mortgages in the UK.

The "credit crunch" has left banks and other lenders unwilling to lend money to each other, as they are afraid that there may be hidden losses.

This has led to a squeeze on the availability of loans, and is threatening to cause total market "seizure".

As such, the Bank of England will eventually be forced to reduce interest rates. Most certainly in the short term it will not increase the rates, as had been widely predicted less than a month ago.

Therefore, ironically, those who hold debt may find themselves in a less worse position than those who have invested their money in funds, pensions and equity.

Funny old world, isn't it?

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Mortgage Lending Down

Mortgage lending fell by 14% in December, compared to November, according to figures released by the Council of Mortgage Lenders (CML).

The CML said £28.6BN was lent by banks, building societies and others to homebuyers during the month; £33.2BN was lent in November.

The figures show that a typical first-time buyer would now expect to take out a home loan 3.31 times the size of their salary. This means that first-time buyers are struggling to enter the market, despite this they accounted for 36% of all home purchase loans in 2006.

Michael Coogan, director general of the CML, said:

"The monthly figures clearly show the cumulative effects of the gradual worsening in affordability for first-time buyers, and the ever-rising proportion of them who are caught by stamp duty.

Although the mortgage market performed extremely well in 2006, the effect of rising interest rates and the continuing decline in affordability are likely to dampen activity somewhat in 2007."

As the first-time buyers are priced out of the market, so will the downward pressure on house prices increase. In other words, the housing market is due for a major correction in the next 18 months.

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