One of the most high profile bank bail out schemes from the government recently has been that of the Bradford and Bingley building society. Whilst the savings division of the society was sold off to the Spanish bank Santander, the UK Treasury and British taxpayer were responsible for looking after the bad credit loans which were held on the society’s loan book, many of which were buy to let homeowner loans.
The now nationalised Bradford and Bingley has just released its full accounts for last year and although the company made an overall profit of £134.3 million before tax over the course of 2008, up from £126 million in 2007, it was also revealed that the society wrote off debts from bad loans with a total value of £508 million and it is expected that this figure is likely to get worse as a large proportion of loan arrears have not yet been fully accounted for and will only show up in later tax periods.
The results show that Bradford and Bingley’s total outstanding balance of all its existing loans is currently in arrears of 0.27 per cent for 2008 and on a case by case basis, 4.6 per cent of individual loans are in arrears, or facing repossession proceedings, compared with only 1.64 per cent in the previous year.
In a statement regarding the level of profit, the bank said that this “Reflects two factors which were a direct consequence of the transfer: the sale of he bank’s deposit business to Abbey resulted in a gain of £216.3 million; and the benefit to net interest of the replacement of retail deposits with statuary debt, net of the cost of the guarantees provided by HM Treasury following the transfer, increased income by £115 million.”
Yet another small building society has gone to the wall as a direct result of the credit crunch and large losses on bad credit loans.
It was announced over the weekend by the government that the Dunfermline building society was to be put up for sale, as it was on the verge of collapsing, following losses of around £26 million. The sale itself was forced by the Financial Services Authority (FSA), the Bank of England and the Treasury, following the announcement of the losses.
Although the government have provided loans to a number of banks and building societies over the course of the past eighteen months or so, the Treasury has said that it is not prepared to provide funding for the Dunfermline, as the society would require a government loan of around £100 million in order to bail it out.
However, the government has said that it will take responsibility for around £1 billion worth of commercial loans and homeowner loans which are currently on the society’s loan books, which should not have any effect on anybody who already has an existing loan with the company. Speculation was raised over the course of the weekend about a likely potential buyer for the Dunfermline and just this morning (Monday 30th March) it was confirmed that the Nationwide building society would step in and buy out the society.
The Dunfermline building society was founded in 1869 and currently has a total of 34 branches, which employ 530 full time staff between them. It is expected that the Nationwide will take on the Dunfermline as a going concern, retaining all of the branches and finding new jobs for the existing employees, although this has not yet been confirmed. It is also not known whether or not the name Dunfermline will remain, or whether the branches will be rebranded as Nationwide.
Since October last year, we have seen a dramatic fall in the Bank of England’s base rate of interest for savings and loans.
The rate has reduced from 5 per cent in October last year, to a record low of 0.5 per cent. It is hardly surprising therefore, that there has been a huge increase in the number of people who are applying for a fixed rate deal when they are looking for a new homeowner loan or secured loan. New research from Legal & General has shown that between December last year and February, 72 per cent of all new homeowner loans were taken out on a fixed rate basis, compared with only 65 per cent over the same period the previous year.
With the base rate as low as it currently is, it makes complete sense to opt for a fixed rate loan at the moment, although borrowers are likely to be paying a significant margin above the base rate, as lenders cover themselves against future rate increases. Anyone applying for a fixed rate secured loan should be wary of the fact that if interest rates increase (which is extremely likely), they could be in for a nasty shock with their monthly loan repayments once the fixed rate period has expired and they should budget for this increase when they take out the loan initially.
Stephen Smith of Legal & General said “Fixed rate pricing has only really started to come down in the past few months and even then only for those borrowers with a hefty deposit. The gap between what you’d pay with 40 per cent deposit compared to what you’d pay with a 5 per cent deposit is still significant. However, fixed rates are very much back in favour, partly because lenders have been increasing the margins on their new tracker mortgages. The challenge though Is to try and convince a borrower on a low SVR to remortgage to a higher fixed rate to insure against the inevitable rate increases which the Bank of England will instigate at some point to combat the threat of inflation.”
It has been claimed that irresponsible lending practices in the past from banks and other personal loan companies has led to an increased level of debt problems amongst consumers.
The Citizens Advice Bureau (CAB) has blamed lending institutions for offering unsecured loans and secured loans to individuals without carrying out adequate checks on their personal circumstances to ensure that they will be able to manage their monthly loan repayments on an ongoing basis. Since the beginning of the credit crunch, an increasing number of people are either losing their jobs, or seeing a reduction in their income through a drop in bonuses and overtime, leading to a severe build up of arrears on their personal loans.
CAB has seen a dramatic increase in the number of individuals contacting them for debt advice and how to manage their loan repayments. A spokesperson for CAB said “People have been able to take out loans, mortgages and credit cards, sometimes in circumstances where they have been persuaded to take them out and the lender should have been checking much more carefully.”
The charity has seen such an increase in the number of debt related enquiries, it has been forced to extend opening hours and employ additional staff to deal with the numbers. The average consumer seeking advice from CAB on their personal loans, owes around £17,000 and somewhere in the region of 10 per cent of borrowers have at least ten different sources of credit, through things such as personal loans, credit cards, store cards and overdrafts.
According to the charity, the average level of loan debt in the UK has increased by around two thirds since 2001, and many borrowers who seek advice have no realistic way of ever paying off their loan debts within their lifetime at affordable rates.
Experts are becoming cautiously optimistic with regards to the increase in activity within the housing and secured loan or mortgage markets, as the latest figures from the National Association of Estate Agents (NAEA) and the British banking Association (BBA) have revealed that confidence levels amongst potential home buyers seems to be on the rise, resulting in an increase in the number of sales which are completing from estate agents and also an increase in the number of secured loans which are being approved by lenders.
The NAEA has seen an increase in sales to the same level as this time last year, with an average of around eight cases per agent during the month of February, around 25 per cent of this figure is made up of first time buyers. At the same time, the BBA has announced that the total number of new loans for house purchase increased to £3.9 billion in February, with a total number of 28,179 secured loans being approved over the course of the month, up from 24,278 in the previous month.
Although the figures for the number of loans is around one third lower than it was at the same time last year, experts are still confident that we are now seeing signs of slight improvement, leading up to what is traditionally the best time of year for people buying houses.
The President of the NAEA, Chris Brown, was confident for the future, he said “The housing market has had a devastating year, but now prices are lower than they have been for a long time and there are bargains to be had. These little signs add up to a glimmer of light at the end of what has been a long and difficult tunnel.”