Negative equity hits one in six prime mortgages

Published 24th Jun 2009

Sunderland hardest hit as new figures reveal the extent of UK's negative equity crisis


Nearly one in six "prime" mortgages in the UK have fallen into negative equity, according to ratings agency Fitch. Households in Sunderland and Northampton are suffering most from the property crisis, it reveals.

Northern Rock has the most once-prime loans now in negative equity, said Fitch, with 32% of the mortgages in its controversial "Granite" book higher in value than the homes they are secured against.

The lender had specialised in offering 125% "Together mortgages" which combined a 100% home loan with a personal loan and were aimed at first-time buyers struggling to get on to the property ladder.

Bradford & Bingley, Birmingham Midshires and Alliance & Leicester – lenders the taxpayer has had to rescue – all have books of mortgages where one in five loans are in negative equity, said the report.

In a geographical analysis, Fitch found Northampton, Nottingham, Derby and Peterborough were the areas with the highest concentration of negative equity. In Northampton, 23.6% of mortgages are now bigger than the value of the property they were used to buy.

But it is a postcode in Sunderland, SR1, which is the UK's epicentre of negative equity. Fitch said that in the SR1 part of the city 43.7% of mortgages (by value) are higher than the current price of the property, and 28.1% by number.

On average, the debt over and above the mortgage in SR1 is just under £6,000. In contrast, in the Cambridgshire towns and villages covered by the postcode CB25, where 27.6% of mortgages are in negative equity, the average amount is £13,369.


Toxic loans

Fitch's analysis suggests the underlying state of Britain's property market may be less healthy than the recent reports of green shoots across the country claim.

It looked into the "residential mortgage backed securities" which were a popular device used by banks and building societies to expand their lending during the long boom. The lenders packaged their loans into books of "prime" business which were then marketed as "triple A" securities for investors.

It has long been known that "sub-prime" securitised books were in trouble – these included self-certified mortgages and loans to borrowers with poor credit histories – but the Fitch report suggests that even "prime" books of business will now be regarded as "toxic" and a drag on bank balance sheets.

Fitch said that 15% of the loans in "Prime RMBS master trust programmes" have fallen into negative equity, and forecasts that will increase to 34%.

"Even assuming that house prices see a modest recovery from their lowest levels, most RMBS transactions are likely to have a sizeable proportion of borrowers in negative equity for some time to come," said Alastair Bigley, at Fitch.

For borrowers, Fitch said the sharp rise in negative equity means that households will be unable to remortgage on to better loan deals when the term of their deal expires.

"Currently, assuming an LTV [loan to value] of 75% or lower is needed to remortgage at an attractive rate, 50% of loans by value (and 35% of borrowers) do not have enough equity to be able to do so. If average house prices fell 30% from their peak then the figure is likely to rise to 62% by value (and 45% based on number of borrowers)."

On a more positive note, it said that borrowers in Scotland have the least negative equity, with Glasgow named as the city with the lowest number of loans in crisis.

Fitch added that Barclays has the fewest loans in trouble, with its "Gracechurch" book still 99% in positive territory.



The top five postcodes in negative equity

•SR1 (Sunderland) 28.1% of loans in negative equity by an average of £5,947

•HU2 (Hull) 27.2% of loans in negative equity by an average of £4,545

•CB25 (Cambridgshire) 27.6% of loans in negative equity by an average of £13,369

•B2 (Birmingham) 31.2% of loans in negative equity by an average of £4,709

•NP24 (Newport) 26.7% of loans in negative equity by an average of £4,910

Source: ' Guardian '

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