It is easy to assume, given the common Anglo-Saxon heritage, that the mortgage markets in the US and UK would be similar, yet there are substantial differences both in how they operate (and used to operate) and in how they have been impacted by the crisis.
In the 90s, certain aspects of the US mortgage markets started to take root in the UK. The specialist mortgage lender, for one, grew from being a cottage industry in 1998 (with less than a 5% market share) to representing close to a quarter of outstanding mortgages a decade later.
This was largely driven by another US import: securitisation. From total UK RMBS outstanding of slightly more than £6bn at the end of 1998, the securitisation juggernaut topped £220bn at the peak in 2009 (18% of total mortgages outstanding) providing the necessary cheap fuel for the growth of the UK mortgage market.
The advent of the specialist lender also brought in another US export, the mortgage servicer. Finally, sub-prime, the sector that was to be the proverbial “canary in the mine” for the 2008 crash, made its appearance in the late nineties, exploding to £25bn in outstandings in 2006 and, according to the CML, accounting for 6% of gross mortgage advances in 2007.
Yet major differences remained:
• Heavy US government support through Freddie Mac, Fannie Mae and other government sponsored enterprises and a much deeper capital market in the US meant that US banks owned 21% (2010 year-end) of mortgages outstanding whereas in the UK banks and building societies owned 84%.
• A distinct preference for fixed rate, amortizing, long term (15 to 25 years) mortgages in the US, driven by government sponsored agencies and capital markets, versus a predominance of variable rate mortgages in the UK (over 70% of all mortgages) and where fixed rates are granted much shorter terms.
• The extensive use of interest only in the UK (over 40% of outstanding mortgages) to lower monthly payments or more recently to provide borrower relief.
These differences partially explain why the average mortgage rate for new lending (as measured by the “National Average Mortgage Contract Rate” in the US and “Mortgage rates on new business” published by the BoE) has traditionally been higher in the US than in the UK.
The crisis came earlier in the US. The Case-Shiller housing index peaks in 2006 signalling the end to one of the headiest housing price rises in US history, with average house prices up 3.6 times in the 20 years from 1987.
In the UK, the pain comes a little later, as house prices continue to test highs for another 12 months, substantially outpacing the US with a 4.7 time increase from 1987 (based on the Halifax’s HPI).
The US sub-prime debacle is already in full swing when Ben Bernanke makes his famous May 2007 speech stating that “we believe the effect of the troubles in the sub-prime sector on the broader housing market will likely be limited”. Yet it isn’t until September 2007 that Northern Rock faces a run on its deposits and is bailed out by the British government.
As much as UK house prices outperformed the US on the way up, they have outperformed on the way down too. Effectively the average house price in the UK is back to summer 2004 levels whereas the US is back to summer 2003 levels.
Mortgages have also done better in the UK. Arrears greater than three months are over 10% in the US versus slightly over 2% in the UK. The reasons for this are varied, including higher monthly payments in the US, a sub-prime sector which was twice as big as the UK in percentage of total mortgage market terms, the predominance of non-recourse mortgages in the US (i.e. the borrower can hand the keys back to the lender without any further liability) among others.
Now the pain has been taken in the US and the housing market, while still far from healthy, it is showing signs of life.
Low interest rates, interest-only mortgages, and a good dose of forbearance have delayed the problem in the UK.
Can the BoE hold interest rates low enough for long enough? Will there be no reversion to the mean in house prices? How long will we have to wait for the economy to pick up? The answer to those questions will determine whether we are over the worst of the mortgage crisis.
