As attention is focused on the United States we take a look at the U.K. where mortgage lenders have a crisis. Bradford & Bingley, the former building society, raised more than £4bn selling off two of its most solid mortgage books. Paragon, the specialist buy-to-let mortgage supplier, announced that it will attempt to repair its balance sheet with a £280m rights issue.
Shares in Paragon crashed 40% after it was forced to arrange a standby emergency funding package worth £280m with UBS.

Paragon has lost more than 80% of its value this year and is now worth just £140m.

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Some say the U.K. is a warning to the U.S. but the news sounds about the same. One third of all U.K. homeowners will face big increases in their house payments. A report released yesterday said approximately 5.5 million people in the U.K. would be effected. Many fell into the subprime trap because of divorce, employment issues, or other unforeseen financial issues. While the U.K. classifies adults as ‘non-standard’ the United States also faces many subprime and ALT-A problems as adjustable rate mortgages reset. The United States classifies the problem as ’subprime’ but analysts say the analogy no longer holds up to examination. Here is why:

“Subprime suggests people with less than stellar credit caused the credit crunch around the world. Such a classification, and total volume of of subprime losses suggest a much bigger problem” said Household – HSBC Watch.

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Hefty losses at its credit card unit are of interest in this article as many said problems would spread. A few months ago we reported that people were keeping credit card accounts current while defaulting on house payments. Not any more, from what we hear from Japan’s MUFG (Mitsubishi UFJ Financial Group Inc.) While losses also came from subprime issues, credit card defaults are alarming. Part of the credit card losses came from restructuring. Analysts look for subprime contamination of other markets because many collateralized debt obligations (CDO’s) are credit card receivables.

Did you ever wonder why your credit card company changed your terms to indicate that everything you buy with the card is collateralized? What are the chances of the company repossessing your toaster? Probably very small, but on paper it is a collateralized asset. But what happens to gasoline and food bought with the card? Therein lies the problem with the theory.

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Barclays and HSBC are on different ends of the mortgage crisis but between them they lost $6 billion from their exposure to the U.S. housing crisis and related credit crunch. HSBC lost money because of U.S. mortgages going bad, and Barclays lost money because of collateralized debt obligations (CDO’s) based on U.S. mortgages. The process of putting together a mortgage pool begins when a home loan is originated by a bank or mortgage lender. That loan is typically sold to a Wall Street firm that pools it with thousands of others. Once a pool is packaged, it is sold to investors in different slices, based on risk. That is the CDO.

One should keep in mind that the U.K. mortgage market is not much better than the U.S. mortgage market. While some say the U.K. market is a bellweather that assumption is based on theories that the U.K. market is approximately 12 to 16 months ahead of the U.S. cycle. Analysts suggest that U.K. regulators did a much better job than U.S. regulators, but through it all Barclays and HSBC managed to lose $6 billion. The faint of heart must not look at the reset period for U.S. adjustable rate mortgages. We are just starting to see resets that should go on for two more years.

Why would HSBC and others actually work with borrowers to refinance their risky loans when the banks cannot sell the paper to investors? If a risky mortgage is already in a mortgage pool is there a tendency to refinance without altering the pool? If so, what happens to the chain of ownership and who actually has the deed to the property? What is the resulting impact of any future foreclosure, also known as repossession in the U.K.?

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Here is an article we expected so see about two months ago. It is also published on Household – HSBC Watch. Insiders at HSBC say we should look for more changes and cutbacks from HSBC in the United States as the bank’s image has been tarnished by predatory lender Household International, and as more people learn that HSBC is the Hong Kong Shanghai Bank Corporation. Shanghai is a municipality of the People’s Republic of China that has province-level status. Heavy investment in Islamic banking doesn’t help HSBC in the U.S. either, said one analyst. Here is the article:

Nov. 8, 2007 — HSBC Holdings Plc, the biggest U.K. bank, said it stopped sales and trading of mortgage-backed securities in the U.S. at its investment-banking unit. About 120 securities jobs will be cut globally, including 20 in the U.K., London-based spokesman Pierre Goad said in a telephone interview today. HSBC has also ceased investment- banking coverage of healthcare in the U.S., he added.

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In the U.K. a foreclosure is called a reposession. Market analysis shows U.K. mortgage issues mirroring trends in the United States, as home owners find it difficult to refinance. The Council of Mortgage Lenders said the global credit crunch was exacerbating trends that were already emerging in the housing market. It said it had already been expecting arrears and possessions to rise, but the situation would be worse than previously expected because of the tighter lending criteria many mortgage lenders are now imposing.

The number of people whose homes are repossessed looks set to soar next year to levels not seen since the 1990s house price crash, it was predicted. The CML warned the five interest rate rises seen since the summer of 2006 would contribute to a 50% jump in the number of homes that are repossessed during 2008. It seems like Americans are not the only ones singing the mortgage blues. Is this a sign of a homogenized global community, or perhaps just profit takers in a run-away mortgage lending industry?

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On October 23rd Asia Times Online said:

For the third time since March, we are in the midst of a significant market selloff, a sharp and painful expansion of what the markets call “risk aversion”.

The first time was in early March, followed soon by HSBC bank’s reporting that its earnings would be negatively affected by problems at its American Household Finance mortgage unit, the signature event that brought the subprime mortgage crisis front and center to the market’s attention. That caused a 7% decline in the US Dow Jones Index, 8.5% in Germany’s XETRA DAX index and a 9.7% decline in Japan’s Nikkei 225 index.

See their full article here as it relates to the global economy.

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The U.S. subprime crisis is being felt around the world, regardless of early reports to the contrary. It seems that many early reports were an attempt to buy time, downplaying the seriousness of subprime around the world while banks and investors bought and sold. Here is one take from the International Monetary Fund:

Japanese Financial Services Minister Yoshimi Watanabe said on Tuesday the impact from the U.S. subprime loan crisis is expected to last for a considerably long time. Watanabe’s comments came after the International Monetary Fund on Monday said the turmoil in global credit and money markets will likely continue as investors worry about the size of financial losses and where they might arise.

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Barclays FirstPlus portfolio mostly comprises second mortgages – loans secured against the borrower’s home, over and above a mortgage. In an environment of falling house prices, these loans effectively become unsecured borrowings – and are one of the segments of the market where bankers are becoming increasingly nervous.

Industry sources believe Seegers is minded to sell the business at a loss rather than run the risk of exposure to rising bad debt charges. FirstPlus reports its figures within the Barclaycard business, where Barclays has been battling bad debts for the past two years.

Barclays sold Monument, its sub-prime credit card business, to US card firm CompuCredit earlier this year. It also came close to agreeing a sale of its Clydesdale Financial Services store card business to Santander, which owns Abbey. But the deal fell apart over price.

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People stood in line in England to withdraw their money from Northern Rock. News from Australia is not much better, where loan defaults rose by almost 30 per cent in the last financial year with failures to pay the bills on time up in every Australian state and territory, figures from the nation’s biggest credit check firm have revealed.

And economists say consumers who haven’t experienced a recession are upping their borrowing to levels more than double their income because they are confident the good economic times will continue. The Australian Law Reform Commission (ALRC) has recommended credit check companies be allowed to tell the banks more about consumer credit files in a bid to stop lenders giving people loans they can’t afford.

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