January 30, 2008 | posted by Michael Baxter in House prices |

A couple of weeks ago, David Smith, economics editor for The Sunday Times, described much of the talk about what will happen when a million or so people come off fixed rate mortgages this year, as daft. Well, if he is right, then the Financial Services Authority can count themselves amongst the daft. Because yesterday, it gave another warning about problems ahead, as these mortgages re-set.

Meanwhile, in the US we were given a foretaste of what could happen here, when two pieces of news hit the news desks, both telling a tale of woe on property ownership and possessions in the US.

Actually, before you read on, you better sit down for this, because RealtyTrac said yesterday that total foreclosure filings in the US leapt 97 per cent last year. In fact, 268,532 poor US souls had their homes repossessed, and no less than one per cent of all US households hit some stage in the foreclosure process.

It’s funny, isn’t it. Some blame the current financial crisis on little more than a misunderstanding. No one is quite sure which banks are in it up to their chest. Well, actually, the reality is far more serious. The reality is, banks completely got their risk analysis wrong, and as a result, one million Americans are suffering the torment of being unable to pay their mortgage.

And while a few years ago, many would-be home owners were California dreamin’ about their new home in the State of Arnold Schwarzenegger, by 2007, many of those dreams had turned to nightmares, as 66,000 Californians were turfed-out of their home. In fact, in total, 250,000 foreclosures were served in the State. The State holding the dubious honour of being second place in the list of states with the most foreclosures was Florida, while Michigan too had a raw time of it.

As for home ownership in the US, according to the US Census Bureau, home ownership suffered the biggest one-year drop on record. In all, home ownership fell 1.1 per cent, to 67.8 per cent of all occupied homes, which is apparently similar to the level in 2002, before the mass take up of subprime mortgages.

Could it happen here? Well, the FSA issued a nasty warning yesterday. You will recall, 1.4 million mortgages are due to come up this year, and now the FSA is saying “that mortgage payments would rise by approximately £210 per month as a result of the rise in market interest rates over the period since the consumer took out the fixed rate, were the fixed-rate mortgage to be replaced by a standard variable-rate mortgage.” It added, “In addition to higher mortgage rates, many consumers are also faced with lenders lowering LTV [loan to value] ratios. There is a risk that some consumers could find it increasingly difficult to obtain funding given the tightening of lending criteria and the reduction in the LTV ratios. “

It warned that around one-third of all mortgages approved between 2005 and 2007 contained an element of higher risk, and of course it is holders of these types of mortgages who will have the biggest problem when their fixed rate terms come to an end. The FSA said, “The spectre of consumers having debt that exceeds the value of their property is not something that has materialised yet but it is certainly a risk we have to take seriously. We are also concerned that consumers are ill-prepared and have placed too much reliance on their ability to obtain cheap credit and housing wealth to sustain their consumption.”