David Prosser's Outlook: Borrowers play musical chairs as the credit crunch hits mortgage lenders

Groundhog day on Wall Street; Chaos in the baggage hall
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The Independent Online

Ever since the credit crunch began to make headlines last spring, one of its curiosities has been the limited impact of the crisis on consumer confidence in the UK. Despite all expectations to the contrary, spending on the high street has not slowed markedly, and aside from the slowdown in the housing market – long overdue in any case – there has been little evidence of the crunch's effects being felt too seriously beyond the City.

One reason that confidence has held up so strongly is that, until now, the credit crisis really has had little impact on most people. Unemployment has continued to fall in recent months and inflation remains under control in most areas of the economy – in fact, the most serious threat to living standards has come from rising utility bills rather than Northern Rock and Bear Stearns.

Yesterday's announcement of mortgage rate increases from Nationwide Building Society, however, may change all this. Britain's second biggest mortgage lender is now charging 7 per cent for a mortgage that tracks base rates up and down, and 6.4 per cent for a two-year fixed-rate deal.

Why are rates increasing despite recent base rate cuts and the expectation of further reductions? The simple answer is that Nationwide is anxious to rein in its mortgage lending. And it's not alone. Halifax, the UK's biggest lender, has also been increasing interest rates in recent weeks. So has Abbey and a string of other mortgage banks.

As recently as two years ago, these lenders wanted your business at almost any cost. Today, in the post-credit crunch world, they are interested only in the safest loans, and even borrowers with faultless credit records and large deposits are having to pay through the nose.

Partly, this reflects the high cost of borrowing on the wholesale money markets, where rates stubbornly refuse to come down whatever the Bank of England does to improve liquidity. But the change of attitude of leading lenders is a bigger factor. Two years ago, most mortgage providers were chasing market share. Now they have become exceptionally risk-averse.

The result is a consumer-oriented version of the institutional credit crunch. Affordable mortgage finance is becoming ever harder to find. As the bigger lenders have increased their rates, borrowers have turned to smaller rivals, particularly in the building society sector. But it has strict rules on how much it can lend in relation to the size of retail deposits; as a result, deals are now being pulled here too.

In December, the Financial Services Authority warned that 1.4 million borrowers with short-term fixed rates due to expire this year would face big increases in repayments when they came to remortgage. Since the regulator sounded that alert, the picture has deteriorated significantly.

Nor is it in policymakers' gift to mitigate these difficulties. The disconnect between base rates and the cost of mortgages makes it impossible for the Bank of England to ease homeowners' pain.

Asked about the possibility of a housing market crash earlier this week, the Prime Minister was understandably keen to dismiss the chances of a return to the dark days of the early Nineties, when 75,000 people had their homes repossessed in 1991 alone. Gordon Brown pointed out that interest rates during that period were up to three times higher than today's base rate of 5.25 per cent.

True, of course. But for anyone remortgaging today, the base rate is an increasingly irrelevant figure. Borrowing costs over the past three years have risen by 50 per cent, just as they did between 1988 and 1990. Moreover, the ratio between house prices and average earnings is today far wider than it was in the early Nineties – homeowners are now much more heavily borrowed.

The most recent official figures on repossessions are at first sight reassuring, revealing that there was only a small increase in the number of people losing their homes last year. But one statistic stands out – some 95,000 orders to repossess (the stage before actual repossession) were made last year, only 8,000 fewer than in 1990.

While there are 2 million more mortgages in existence today than back then, there is now no ducking the fact that a very sizeable number of people are going to face big problems staying on top of the cost of their home loans during 2008. This year's figure for actual repossessions is likely to be much larger.

Chaos in the baggage hall

With the benefit of hindsight, problems at Heathrow were inevitable. Amid the fanfare that accompanied the opening of Terminal Five, we should not have forgotten that unbreakable rule of nature, the law of sod, which dictates that if something can go wrong, it almost certainly will.

Yet with the greatest respect to anyone caught up in the baggage-hall chaos yesterday, T5 remains a triumph. As an engineering project, it dwarfed the redevelopment of Wembley Stadium, let alone the construction of the Millennium Dome, yet it was completed on time and on budget. It's a fantastic building with strong green credentials that will take the pressure off the rest of Heathrow's overcrowded, crumbling, facilities.

All of this will, naturally, be forgotten as long as T5's teething problems persist. And for BA and BAA, yesterday's scenes will have caused huge embarrassment as well as concerns about longer-term repercussions.

The worry for BAA is the damage to its reputation for operational efficiency. The airports operator won an unexpectedly generous deal from regulators on airport landing charges, but it is still facing an investigation into whether it should be broken up. Every further allegation of incompetence is a weapon in its critics' armoury.

BA, meanwhile, has a different headache. Its focus on high-paying business customers means it must deliver a better travelling experience than most of its rivals. The ghastly state of Heathrow has until now prevented it doing so, and yesterday's events will hardly have encouraged premium customers.

Still, yesterday was day one. By the time the first flight lands at T5 today, maybe someone will have found the right switch for the luggage belts. And maybe BA's staff will be able to find their way round the building.

Groundhog day on Wall Street

Is John Meriwether about to complete a rather unfortunate hat-trick? Immortalised as one of Salomon Brothers' "big swinging dicks" in Michael Lewis's Liar Poker, the unputdownable account of the excesses of the investment bank during the Eighties, Mr Meriwether was subsequently caught up in the trading scandal that eventually lead to the demise of Salomon in the Nineties. Then in 1998, the collapse of LTCM, the hedge fund he launched on leaving Salomon, plunged financial markets into panic, before the authorities organised a bail-out. Now it appears his latest hedge fund, JWM Partners is also on the brink.

Two weeks ago, Mr Meriwether sought to reassure investors in his fund that he had learned the lessons of history, explaining that JWM's exposure to risk had been sharply reduced during the first few months of the year. Unfortunately, however, the domino effect sweeping the crumbling hedge fund industry now seems to be heading his way, all the same.

Not that Mr Meriwether is the only one revisiting his past. The bail-out of LTCM prompted a furious reaction from Wall Street's critics who argued that, by stepping into rescue the fund, the Federal Reserve was effectively encouraging investors to take on ever greater risks in the knowledge that they would be rescued in the event of disaster. Sound familiar?

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