The Royal Bank of Scotland has today come to the rescue of many mortgage holders across the country with a promise that no home will be repossessed in the first six months of mortgage arrears. The move was fairly unexpected and is exactly double the length that the government had been asking for in recent days. This does however mark an important point in the ongoing battle between the banking sector and the government will allow those with mortgage arrears to reorganise their assets and finances.
The move is applicable immediately and with Royal Bank of Scotland and its NatWest bank subsidiary controlled and 7% of the UK mortgage market there will be a number of homeowners breathing more easily tonight. However, many people are starting to question why the decision was taken and what impact it will actually have on the UK housing market.
While the Royal Bank of Scotland will claim that the move has been in the pipeline for some time, after pressure from the government and the financial services authority, there would appear to be a more sinister undercurrent to the recent change of heart. Some observers are suggesting that the recent announcement that the UK government has taken a 57% stake in Royal Bank of Scotland, under the terms of the rescue package, gives them undue sway over the direction of the bank.
As you may expect, this has been refuted by both parties who are both quoting the actual rescue package terms which involved an obligation to assist the housing market in the short to medium term. In all honesty the truth probably lies somewhere between the two strands of thought but the bottom line is that finally progress has been made and the UK taxpayer feels as though their interests are now being taken seriously.
What it actually means
Under all of the explosive headlines, the compliments from the various regulators, government and charitable organisations, what exactly does the six-month window of opportunity give to UK householders?
In simple terms it ensures any homeowner who falls behind with their mortgage payments will have a minimum of six months to reorganise their assets, finances and arrange a new deal with their lenders. Further on down the line it will also give many homeowners the opportunities to benefit from a recovery in the economy as and when this maybe. On the downside, as helpful as the six-month window of opportunity may be there are still a great number of UK homeowners who will experience repossession although this would delayed for at least six months.
In all honesty this is unlikely to have a major impact upon the UK property market in the current environment. It will however slow the constant drip feed of houses on to the market and may offer a little more stability than we are seeing at present. Prices will be relatively unaffected in the short to medium term as those looking for repossessed homes will just wait six months and see what comes on to the market when the window of opportunity starts to close.
The UK market needs all the help it can get at the moment with the constant drip feed of bad news starting to impact more severely on sentiment than ever before. There is a feeling that unless the UK economy swings around and shows only some kind of stability in the short term after the recent fiscal injection by the UK government, the situation will get much worse in 2009 and 2010. Prices continue to fall although interestingly the rate at which property prices are dropping is varying across the country with some markets showing more signs of life than others.
While the move to offer the six month window of opportunity has been welcome, many people will soon start to realise that the banks will not be able to carry assets which are producing reduced or no income forever without making up any shortfall elsewhere in their business. This is likely to lead to a reduction in the number of mortgage promotional deals and indeed we could see mortgage rates tick higher as the banks look to cover themselves on their profitable and secure mortgage deals.
This would be a very awkward situation for the UK government as they cannot force a bank to carry non-income producing assets forever and a day and do not expect the banks not to make up any shortfall elsewhere in the business. So it seems as though those in mortgage arrears will benefit in the short to medium term and those looking to remortgage or indeed take out their first mortgage may well see rates tick higher.
Increasing mortgage liquidity
While the six-month window of opportunity is very useful as far as it goes, it will not increase the liquidity available to those looking for mortgage finance. This is the backbone of the government rescue plan and until we see real progress on this front it will still be deemed by many to be a failure. The whole idea of the rescue package was to stabilise the banks and then pump increased liquidity into the marketplace to support the property market throughout the UK. This has just not happened or at least not yet.
The move by the Royal Bank of Scotland has been welcomed across the board and there are high hopes that other banking institutions in the UK will follow suit and announce their own mortgage arrear plans in the short term. In the medium to longer term, as long as the economy continues to struggle, this will only delay the inevitable for many but will allow some to reorganise and reschedule their liabilities in order to at least attempt to retain possession of their home.
The government seems to making some progress although in many cases it seems to be one step forward and one step back with mortgage rates unlikely to fall in the future, and more likely to rise, to cover any carrying costs and potential losses from the mortgage arrears window of opportunity. While progress may well have been made, there is still a very long way to go.