Problems at U.K.'s Northern Rock (something I blogged about recently here) have underscored that the United States isn't the only country facing a crisis associated with the availability of easy mortgage credit -- an issue receiving wide coverage from the financial majors this week. The Wall Street Journal says that a U.K. crunch may be in the offing, noting that "[t]he Northern Rock episode illustrates how the credit turmoil that began with risky mortgages in the U.S. could be setting the U.K. up for a fall." From the story:
In the past decade, U.K. consumers have become more dependent on borrowed money, both to buy homes and to finance spending. As of July, total mortgage debt in the U.K. had reached £1.1 trillion ($2.2 trillion), more than double the level of 10 years earlier and equivalent to more than 80% of annual gross domestic product. In the first quarter of this year, U.K. homeowners tapped their home equity for about £13.2 billion, or 6.1% of disposable income, an indication of how much rising home prices have been raising consumer spending, which makes up about two-thirds of the U.K. economy.
Subscribers can read the full article. The common culprit here, at least on the mortgage spending side, was the emergence of the capital markets as a funding source rather than a more traditional reliance on deposits (sound familiar?). The ethos of the British culture sounds awfully familiar to our own, according to this New York Times article:
“There's no longer any stigma or fear attached to borrowing,� said Chris Tapp, deputy director of Credit Action, a nonprofit group that helps people deal with debts. “We've seen the economy grow on the back of easy money and easily available credit, and it's changed the culture and the way people use their money and spend here — it's become a ‘buy now, pay later' culture.� That is the way of all modern consumer societies, of course. But it is particularly noticeable in Britain because it is a relatively recent development, and because it is such an abrupt break with the past. A country that used to pride itself on thrift is now awash in almost $2.75 trillion of consumer debt — the highest ratio of debt to personal income in the developed world.
Looking back to Northern Rock, its problems are far from over -- the Financial Times reports that pressure from saleholders to find a buyer is building. And no buyers are readily emerging as of yet:
The board of Northern Rock is this week set to come under pressure from agitated shareholders pushing them to sell the bank as quickly as possible. But the prospect that the embattled mortgage lender could simply be left to wither as an independent entity is increasing as a full-blown takeover fails to emerge. The bank and Merrill Lynch, which has been conducting the sale process, have been working hard to drum up buyers and late on Friday Northern Rock's shares were lifted to 194.3p on rumours they had succeeded. However, analysts doubt a large bank - or any other bidder - would be willing to take on the uncertainty of financing Northern Rock's funding book in the interbank markets.
Again, does this sound familiar? (It should.) It's issues like this that have underscored some of my comments earlier on this blog about how we're in untested waters right now. The mortgage banking business has been and always will be cyclical -- that much hasn't changed -- but this industry has never experienced a downturn as embedded as we now are into the world's financial markets. The emergence of the secondary markets both here and abroad -- and the worldwide audience willing to invest heartily in this relatively new space -- has made what happens in housing in general (and mortgage banking in particular) something that matters far beyond our own borders. A loss of confidence is therefore a global problem, and one that will be felt outside of the States.