British Politics’s Blog

The ravings of an individual, UK voter frustrated with our politicians

Posts Tagged ‘mortgages

Stop banks from carrying forward losses to offset future profits

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Most analysts forecast that most, if not all of our high street banks will shortly announce record breaking losses, as many re-value their assets and take the write-off’s on the chin. In fact, informed pundits are suggesting that this will continue for another 2-3 years. Well, there is little or nothing we can do about that.

However, any bank that has been in receipt of state aid, support or taxpayer sponsored insurance schemes must not be allowed to benefit from a double whammy. That is to say that, whilst the taxpayers of this country take on much of the risks associated with their recklessness, the banks carry forward these massive losses, to allow them to offset past losses against future profits. That would most certainly rub salt into the wound. Under current taxation rules, business can carry forward past losses, to set against future profits. This concession made sense for most businesses that have a difficult year or two, or those that are in a start-up phase. It should not be used to reward banks and their shareholders, when they have had to rely on a state bailout or support programme to allow them to survive intact.

Government ministers and opposition parties must provide the assurances, here and now, that the banks will not be permitted to carry forward past losses, to offset against future profits where these banks have been in receipt of any state aid. A failure to do this will allow banks and more specifically their shareholders to receive handsome ‘tax free’ rewards at the very time that the taxpayers will being having to accept higher taxes as a direct conseqeunce of the banking crisis and the largesse, or indifference of our government and ministers. This would be completely unacceptable. If the banks were not so integral to our economic well being, they would not have been treated as a ‘special’ case and received such massive state aid. But they are and they have been. MP’s must now undertake to identify the banks as a special case in the future, given the racing certainty that they would, under existing rules, be rewarded with future tax breaks/concessions.

Once we come out of the other end of this recession, taxes will rise and if the past is anything to go by, the public will be expected to pay the lions share through direct and indirect taxation. This country will need banks and industry to pay their fair share. We cannot afford any bank or any business to use 2 or 3 years of losses to offset against the following 2 or 3 years profits. Everyone needs to make a contribution. If business, such as the car industry are in receipt of state aid, then they must also be prevented from offset past losses against future profits, similarly, if these businesses are not registered in the UK for tax purposes, then they must undertake to do so before any taxpayers funds are advanced and for a period beyond, to make sure that taxpayers benefit in the future. Now is the time to be negotiating tough terms and looking ahead in terms of these banks and businesses making a real and tangible contribution in the future. A failure to do so will result in a massive public backlash in the future.

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UK Economy, can the future be so bright?

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It doesn’t really matter who you listen to, everyone seems to believe that we will come out of the recession leaner and stronger, with most arguments centering on how deep and how long the recession will be. There are also varying estimates as to the level of debt UK Plc will have and also how long it will take to reduce this debt mountain via increased tax revenues. Maybe I am cynical, naive or just plain stupid, but I can’t for the life of me see what we are going to be left with when the recession does actually end.

We know that after the last recession, our manufacturing industry was virtually decimated, not only did many people lose their jobs, but an industry dating back to the Victorian times disappeared virtually over night. Therefore, even if the pound is weak, surely we cannot rely on manufacturing to provide jobs and tax revenues.

So what of the financial services and banking industries? As we all know, this particular recession has been brought about, for the most part, by poor lending decisions of the banks. In addition, much of the profit derived from The City was via ‘manufactured’ trades of bundled mortgages, securities and so on. The financial services and banking sector have now had their fingers burned. In addition, one of the main attractions of the UK was light regulation, and there is every indication that the UK authorities will now start to tighten the rules. Taking all these things together, it is most unlikely that the UK banking and financial services sector will ever look the same again, nor will it offer the same levels of GDP contribution, jobs or tax revenues. Added to which, with many financial institutions and banks harbouring massive losses, it is quite likely that they will not have to pay any corporation tax for a good few years to come.

As our manufacturing base declined, our GDP was propped by the banking and financial services sector, given the above, do we really have any hope of a strong recovery from any of these sectors? I think not. On top of everything else, before the recession, the government were steadily increasing corporation tax as well as red tape. As a direct consequence, the UK was no longer the land of milk and honey from a tax perspective. So in recent years we have seen more and more companies registering their businesses abroad for tax purposes. Southern Ireland is a case in point, where their tax regime is considerable more attractive than our own. This will lead to a further loss of jobs and more importantly in the current debt climate, a loss of tax revenues.

Then their is our carbon emissions targets. Our government has committed to a reduction of 80%, this is not empty rhetoric, they intend to make it legally binding. Similarly, a reduction in carbon emissions is not incentive driven, instead is uses a stick rather than carrot approach, meaning higher ‘green taxes’. These taxes will hit not just business, but individuals as well and of course the price will have to be paid both at the tills and in the way of fewer jobs. What this means is that is that any UK business will be subject to higher direct taxes and higher indirect taxes via ‘green’ initiatives. Now, because the UK is one of the few countries taking carbon reductions seriously, it means that companies operating in the UK will be subjected to a competitive disadvantage when compared to other countries.

Then look at what has been driving sales over the past 10 years, the so called “credit bubble”. The economy has grown as a direct result of easier credit, low interest rates and rising house prices. The latter has made people feel more wealthy, leading to a release of equity through remortgages or secured loans, the ‘easy’ money has than been spent in th High Street, on consumables, cars and nice holidays. In a harsher climate, with less money available to consumers, a stagnant housing market, higher taxes and fewer people in work, it is difficult to see how or when we can expect a return to ‘business as usual’.

So, whilst I know the politicians hate to paint a picture that is considered too negative or gloomy, I would like to witness them share their thoughts on just how everything is going to be fixed and over what timescale. Becuase, in all honesty, unless I am missing something, the future does not look too bright.

Mortgage assistance for struggling homeowners

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Although the government has yet to provide the ‘small print’ for their help for struggling homeowners, some details have emerged. According to the government, the following mortgage providers have agreed to support their plan, HBOS, Nationwide, Abbey, Lloyds TSB, Northern Rock, Barclays, RBS and HSBC. These companies account for some 70% of the domestic mortgage market.

Currently, people who are on a Job Seekers Allowance, or income support, can apply for taxpayers money to help repay the interest on their mortgages. Previously, the government stated that the maximum value of the mortgage where interest would be paid was going up from £100k, to £175k, this will now be £200k. Those claiming JSA will see this support limited to two years and borrowers that have a working spouse or partner, or savings of over £16,000 will not qualify for this support.

The new plan sees many of the major mortgage companies agreeing to extend the minimum period before they action repossession proceedings from around 3 months to 6 months. This is fairly significant, but I will come back to this point later. Another part of the plan, which currently lacks any detail is support for people that have suffered a significant loss of income, perhaps a loss of overtime, one partner having been made redundant, or the borrower having to accept a lower paid job. Here, borrowers with mortgages of £400,000 or less, will be able to defer interest payments, which will then be added to the capital. The Treasury will then underwrite the additonal ‘risk’ normally borne by the lenders. This programme is designed to complement the existing mortgage support provided to those on income support or a Job Seekers Allowance.

However laudable the scheme, there is a very limited benefit to those that have taken out some type of ‘secured’ loan and subsequently default. This is because, not surprisingly, the government are not prepared to underwrite secured loans. The problem here is where a borrower has defaulted on a loan that is secured against their property, the lender can apply to the court to have the property sold, in order that they can recover their money. Now, many people have taken out these types of loans, rather than re-mortgaging their properties, to fund lifestyle purchases, extensions, cars and so on. Therefore, irrespective of the good intent of the mortgage companies or the government, their plans are at risk by the actions of any third party with a second charge. But there is something else that I believe is far more scandalous and that is the way lenders who have provided unsecured loans can seek to get a charge on a borrowers property, let me explain.

The borrower takes out an unsecured loan from a credit card company and subsequently default. If the card company believes that it will cost more to service or collect the debt than it is worth, they will often sell on the debt to a specialist company than collects debts. These organisations often pay only 10-15% of the face value and may purchase hundreds of millions of pounds worth of bad debt. They then employ very aggressive tactics to collect the money. If these don’t work and the debtor is a homeowner, the debt collectors invariably apply to the court to have the debt secured against the property and in most cases, this application is granted. Now the debtor will have the loan and any associated collection, legal and court costs added to the original debt.

The courts are complicit in this whole process, given some debt companies literally ‘book’ a court for half a day to process these applications. What must be particularly galling for the borrowers, is that the costs associated with this application can add substantially to the original debt, in addition to which, the courts take no account of the fact that the original debt was unsecured and therefore, the interest rate that was charged at the outset would have reflected the lenders additional risk. Having successfully managed to secure the debt, these debt companies will now typically ratchet up the pressure on the debtor, often getting them to agree amounts that they simply cannot afford, which is, arguably what the debt company wants. Because once there is a default, the debt company can apply to the court to have the property sold and that is invariably what they do.

Now the government cannot deny knowledge of this common practice, nor the fact that an obscure 1925 law is being used to achieve the objective of the debt management companies. Gordon Brown was asked about this very issue during his monthly meeting with the press and chose to ignore it, by repeating what the government were doing to help mortgage holders rather tha the legitimate issue that was raised. Yet, for a man that likes to legislate for anything and everything, he did not grasp the nettle and suggest that the government will look to repeal the legislation being exploited by these debt companies.

Now don’t get me wrong. Everyone must be responsible for their own actions and I do not believe in government intervention with taxpayers money, other than what is strictly necessary. But there is a need to distinguish between those that can’t and those that won’t pay. I have no sympathy for the latter. However, those that can’t pay should be treated sympathetically, they should not for example, have to endure the massive hike in the debt as a direct consequence of these debt companies taking completely unecessary legal action to gain security for the loan and/or a forced sale. The courts must be far more sympathetic to the borrower, for example, asking these companies what they expect to achieve by gaining security for what was originally an unsecured debt. Lets face it, unless the debt company intends to force a sale, or use the security as additional leverage, there is no point. No court should allow companies that have purchased unsecured debt, at 10-15% of its face value, to rack up the charges and costs and then secure the debt. Similarly, the government must urgently repeal the law that allows them to make this application, particularly in light of the assistance they are claiming to offer borrowers to minimise the risk of them losing their homes.

The bottom line, is that unless the government deals with this issue, then it can be reasonable argued that they are not serious about trying to keep people in their homes. Because someone that has taken out, for example, a credit card on an unsecured loan basis, could very quickly and quite easily find that they could be losing their home at the instigation of a debt purchasing company that has managed to secure the loan and by default, prevent the borrower from gaining any government support or assistance. These debt purchasing companies are making massive returns on their original investment and they are very effectively exploiting legal loopholes to put people out of their homes in order that they can get a quick return, in what is supposed to be contrary to the government stated goals. The debt purchasing companies are not acting responsibly and need to be tackled. Why, therefore is this government doing nothing to put a stop to it?

Do not bank on the banks

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My attention was turned to an interesting post over at Power to the People which followed on from my own post in respect of a bankers claim that “banks are not charities“. The post that I am referring to relates to corporation tax that banks would normally pay and comes at the whole issue from a perspective I had not considered, but is, nonetheless, very relevant in the current economic climate.

As everyone knows, the high street banks are posting massive losses as they move to write-off questionable assets and large consumer debts. However, under the current HMRC rules, they are entitled to carry over losses to offset against profits in future years. This means, that in spite of the significant risks being borne by the UK taxpayer as a direct consequence of the banking bailout, when things improve, there will be no win for us. In other words, the big banks, will not have to pay any form of corporation tax for some considerable time to come, perhaps, in some cases, for the next 5 years.

This, whilst perfectly legal, is an outrageous state of affairs and in my view, must be treated as an exception to the rule. Gordon Brown must bring in urgent new legislation to prevent the banks carrying forward these massive losses to set off against future profits. The principle of carrying forward losses is a good one, however, in this particular instance, it would leave the taxpayer with a very sour taste indeed. Failing which, the government must advise the banks that they could be subject to a windfall tax equivalent to any loss to the Exchequer in terms of tax revenues. The full article can be read here: Will taxpayers lose out to the banks again?

UK banks are not charities

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A senior figure at one of the major UK banks was quoted on Channel 4 News as saying that “banks are not charities“, needless to say this coward was not willing to have his name revealed. But what hypocrites these banks are, they claim that they are not charities, yet they clearly think that the UK tax payers are, after all, only a few weeks ago, they had to come begging for our help.

It is well known that high street banks are the most loathed businesses on the high street and their leaders and managers are, for the most part, considered with the same disdain as politicians. But, what arrogance they demonstrate, these people (high street bankers) made the decisions that ended up with their banks having to come begging for help, they made it easy for people to borrow, they were the architects of their own demise. Now they seek to lecture the government and issue a veiled threat to the very people that have risked their money to protect the interests, jobs and shareholders of the high street banks. They are pathetic, blood sucking creeps, that do not deserve their vast salaries and positions. How dare they lecture us, fair weather friends indeed. I hope this idiot has the courage to ‘own’ his statement, rather than hide in that cowardly way, only politicians and bankers know so well.

I stated in my post yesterday that the public should, when practicable, vote with their feet and punish these bankers by withdrawing funds and cancelling our current accounts and credit cards with all of the banks that so clearly look upon us as the necessary evil, rather than respect.

I also appreciate that many people will not, at this time, be in a position to punish the banks by withdrawing their business. But I do believe, when we are, that we must deliver a hard-hitting message to the banks that have turned their backs on the very people that came to their aid. The banks cannot survive without customers, fact. Every 10 years or so, they go through a phase of telling us they don’t want current account business and shortly afterwards, they realise that they do and go on a recruitment drive. We should all let them know what we think of them for turning their backs on us. Full article

In the meantime, the government should consider their position carefully, the public will not appreciate our money being risked by banks that have little or no regard for the well being of their saviours and their customers.

UK banks continue a path of self-interest

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I was pleasantly surprised when the Bank of England announced that there was to be a further reduction of 1.5% in interest rates, dropping to 3%. After all, most of the economists arguedthat the banking bailout would not work, unless or until there was a “substantial” reduction in interest rates. So, eventually, the Bank of England reacted positively, even if they could have gone further.

So what have the main UK banks done? The answer, little or nothing. With the odd exception, the Cheltenham & Gloucester and the Bank of Ireland for example, none has announced a reduction in the rates they charge their customers, claiming only that the matter was under review. Now I know that the LIBOR rate is supposed to be an influencing factor,  but if the banks were to pass on the 1.5%, surely they would be neutral.

The whole point of the Bank of England reducing the interest rates, was to provide the economy with a well needed shot in the arm, but if the high street lenders do not reduce their rates accordingly, it will be a largely meaningless initiative. I have read a few blogs and a number are calling for some form of positive action by banking and mortgage customers, but for the most part, it seems to be creating nothing of a stir. My own view is that that banks have received massive support from the UK tax payers and many of these people are also their customers.

Therefore, I believe the banks have a moral obligation to offer their support by passing on the rate reductions in full, at the earliest opportunity. Prevarication should not be an option. Banks were careless in their past lending practices and therefore they have to shoulder some of the responsibility for the situation many borrowers find themselves in. Not all, but some. high street lenders and mortgage companies could help themselves (in the long run) and their customers in the short-term by recognising the fact that the economy and many of their customers need and probably deserve an economic stimulus as would be provided by a rate cut.

One website has suggested a boycott of banks that do not pass on the rate cut, especially those that have received tax payer funded state aid. I agree. I also appreciate that many people will not, at this time, be in a position to punish the banks by withdrawing their business. But I do believe, when we are, that we must deliver a hard-hitting message to the banks that have turned their backs on the very people that came to their aid. The banks cannot survive without customers, fact. Every 10 years or so, they go through a phase of telling us they don’t want current account business and shortly afterwards, they realise that they do and go on a recruitment drive. We should all let them know what we think of them for turning their backs on us.

I earnestly hope that fellow bloggers out there will post more on this issue and try, together, to pressurise the high street banks into action and encourage a backlash if they don’t act positively. I am also disappointed, that the government did not include some form of pre-condition, that state aided banks should pass on any interest rate cuts. It is not as if the UK government were not aware that 1. interest rate cuts were inevitable, 2. banks would try and profit from cuts and 3. there would be a public backlash against the government if state aided banks were to shaft their customers.

UK public turn their backs on home ownership

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Okay, okay I know this is not today’s headline, but there must be a real risk, that in the not too distant future, we will see such a headline. Since Margaret Thatcher persuaded millions of people that home ownership was a goal worth aiming for and, lead the way with a massive sale of local authority owned houses, the British public have had a massive appetite for home ownership. But given the last property crash and the current turmoil, will this continue?

The term ‘negative equity’ entered the vocabulary of the masses in the early nineties when, in no small part due to interest rates rising to 15%, property owners watched as the value of their property tumbled. Worst affected, were those that had bought at the top of the market and/or had already over-stretched themselves in order that they could jump on the property ladder. Some people were forced to watch as their mortgage repayments virtually doubled and they had no way to extract themselves, because the property was worth less than what they had paid.

Fast forward another 16 years or so and we are witnessing the same issue of negative equity, albeit for different reasons. Now, whilst interest rates are low, people can’t afford to sell, many others are forced to live in houses that are no longer suitable, perhaps because they have more kids, or less kids! Maybe they need to move because of a job, whatever, these people are trapped, with no simple way out. Now, I am covering an issue that has been dealt with elsewhere, but he is my prediction for the future.

My Prediction for the Future of the Housing Market
I believe that it will be a case of, once bitten twice shy, anyone that has been a ‘victim’ of the housing market twice in less than 2 years and for that matter, others that have witnessed the stress and strain of people suffering, will think twice before buying a home. Why for example would anyone want to see a house increase in value, because, unless you are in a position where you can buy it, live in it and sell it at the right time and move into rented accommodation, there is no real benefit?

The government spout on about “social mobility”, yet having to sell a property and buy another reduces social mobility. In addition, the cost associated, even based on ‘average’ prices is substantial. Most people will find their costs in terms of agents fees, solicitors costs and stamp duty will be far in excess of £10,000. So, if you need to move to a larger or smaller house, you want to move closer to family, move to another job, or even for a better school, you have the major headache of having to sell your home and buy another, something that has been adjudged to be one of the top two most stressful situations a person is likely to have to endure.

In many countries, such as Germany, property ownership is not seen as something people should aspire to, therefore the vast majority rent their family accommodation. This means that it is easy to move house when the need arises and that it is far easier for families to budget their living expenses. Rented homes tend are not subject to the vagaries of ever changing interest rates, nor do they come with the responsibility of high, often unexpected repair bills, at least not for the tenant. Yes, people do not benefit from an increase in property values, but then they do not suffer during downturns either. If someone was to do the maths, even with properties averaging a capital increase of 10% per annum, it is quite possible that people are no better off with property ownership. Because, if you factor in other costs, such a higher monthly repayments, building insurance, repair and maintenance costs, purchase and sale costs, moving house 2 or 3 times in 10 years and any ‘profit’ is likely to be quickly lost.

I believe that we will now see a raft of new, very large property companies forming, who will take on the risks associated with owning property and a substantial rise in people renting. No longer will people be so easily fooled into feeling wealthy if their property values increase, because it will be clear that any value taken out of the property in terms of equity, will be little more than a loan, unless they expect to be in the position of being able to sell the property in the future without having to buy another.

The so called stigma associated with not being a property owner is going to fall away, there will be a whole new perspective on property ownership, people will start to see that it is a potential albatross, that has the potential to restrict mobility and therefore, quality of life. People that rent will be able to move to areas where the best jobs are, where the best schools are or where their family or friends live. Tenants will be able to budget with confidence, knowing that at worst, they will see a small increase in their rental costs, but with a dearth of companies to choose a property to rent from, prices will be kept competitive and choice will be much increased.

Property ownership is a mindset, the last two generations have been brought up with the belief that if you don’t won a property, you have failed, or you haven’t made it, but we must all ask ourselves if this is really the case. I believe people will and this mindset will change. Government must also change their approach, especially if they truly want social mobility to work, they must promote the notion that a happy and settled home is far more important than whether it is owned or rented, they must make clear that people that choose to rent rather than own are not second class citizens and above all, they must offer that same levels of protection and incentives to people renting properties as those owning.

As repossessions rise, there will be a dearth of properties for sale and many of these will be bought up by property speculators at a discount of 25% of their ‘current’ market values. Unlike the previous speculators that wanted to set up a pension scheme using ‘buy to let schemes’, these businesses will be serious about owning properties for their rental incomes, rather than their potential capital gains. They will look at rental yields, much the same as the owners of industrial and commercial properties do. In other words, they will be professional landlords, operating in the home rental market. Admittedly, some of these companies, may be small to start with, but it is quite likely that they many will merge and/or sell to similar organisations and within a short period of time, we will see a number of large, professional home property rental companies. This is where I predict the future will be in 5-10 years from now.

The British love affair with property ownership will, for the most part, die away with this current property crash. They will start to see the real benefits of property rental, in the same way, that many people lease their vehicles for 3 years, rather than owning them. They will start to realise that quality of life is measured by happiness, living in the right type of home that meets their current needs and not to determine their place on the social scale by the worth of their house or the equity locked away within it. If my prediction comes true, then I believe it will be no bad thing, because quality of life, is far more important than quantity.