Lloyds: fifth of mortgage customers in negative equity

A fifth of Lloyds Banking Group mortgage customers were in negative equity at the end of June, figures from the bank revealed today.

Halifax owner Lloyds said falling house prices were to blame for the figure, although high loan-to-value mortgages would have left homeowners at greater risk of owing more than their property was worth.

Lloyds said total mortgage lending by its high street business was £18.3 billion in the first half of the year, nearly 60% less than the figure in the same period last year.

The firm said the overall mortgage market for both house purchase and re-mortgage had "slowed considerably" with a 55% drop in lending as low interest rates on lenders' standard variable rates dissuade home owners from looking for new deals.

The proportion of customers in negative equity jumped to 20.4% by June 30, from 16.2% in December.

The lender also revised its predictions for house price falls today to 7% or less during 2009, from an initial 15% forecast.

A spokeswoman for Lloyds said neither of the main Lloyds TSB or Halifax lending businesses had ever offered more than 100% mortgages, although she said the Birmingham Midshires arm had offered a 125% deal that was withdrawn from the market last February.

Within the figures, almost a third of buy-to-let mortgages and 25.9% of specialist loans - which include controversial self-certified and sub-prime deals - were in negative equity.

The UK's largest lender also said the rate of mortgage defaults rose in the period, with 2.44% of loans more than three months in arrears compared with 1.79% in December.

Lloyds said 1.1% of those who owed more than their home was worth were more than three months in arrears.

Across the whole high street business - including personal loans and credit cards - bad debt charges rose 60% on last year, to £2.2 billion, due to rising unemployment and falling house prices.

Lloyds said the increase in joblessness this year means it expects a moderate rise in bad debt charges in the second half of the year for the division, which should represent the peak of its impairments.

The bank stopped all sub-prime and self certified mortgages at the beginning of the year and said it would now focus on prime lending.

Around 80,000 mortgages - or 2.44% of the whole portfolio - were in arrears.

Of these, Lloyds said around 3% of the buy-to-let loans it had inherited from HBOS were in default. This compares with 0.73% of buy to let mortgage accounts from Lloyds TSB.

The firm said its high street arm had "maintained its commitment to the housing market", by allocating more than 50% of new lending in the first half for house purchase rather than for re-mortgage.

The bank said its share of gross lending in the mortgage market had reduced to 27% from 30% last year.

Net mortgage lending in the period - which strips out repayments and redemptions - was £1 billion, representing a 37% share of the market.

Lloyds has committed to lending £28 billion in mortgages and business loans over the next two years.

It has also identified £300 billion of risky assets - about a third of the group's total balance sheet - and will run off £200 billion in the next five years. It said about £100 billion will be used for business and household lending.

The bank said its wholesale division "fully embraces its role in supporting the recovery in the UK economy" and would support businesses.

It said lending to small businesses was ahead year-on-year in Lloyds TSB and Bank of Scotland was reopened to new lending, while 60,000 new commercial accounts were opened.

Total loans and advances to customers in its wholesale division slid 8% to £216.4 billion.

Impaired loans increased by 72% to £31.7 billion, while losses on bad debts rocketed more than 800% to £8.3 billion.

The firm added that its small business portfolio was "showing signs of stress", but said that was to be expected at this stage in the recession.


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Should Northern Rock cut mortgage rates?

Northern Rock became infamous for its 125% Together mortgage and was at the forefront of the 100%-plus mortgage movement.
However, while it had a chunk of customers with little equity, or none at all, it also had plenty of customers with good credit histories and substantial equity.

Since then a 20% fall in property prices has hit and this has caused major problems for those who took out mortgages with little or no deposit.

They are now in negative equity – their mortgage is worth more than their property - and will find it difficult to remortgage or move home.

But being in negative equity does not mean you will default on your mortgage or lose your home, as long as you can keep up with monthly payments and preferably start overpaying to chip away at the debt.

And this is where Northern Rock's bad debt problem comes in.

Northern Rock's bad mortgage debts have been exacerbated by the decision to encourage remortgaging customers to leave Northern Rock following its nationalisation: with the carrot of telling them they could get better deals elsewhere and the stick of failing to lower standard variable rates in line with the base rate.

This led to large numbers of good borrowers deserting Northern Rock for better rates at other lenders, but those who had borrowed large amounts found themselves unable to get mortgage deals from rivals.

These borrowers are now stuck with Northern Rock and despite Government calls on lenders to lower mortgage rates as the base rate fell, the taxpayer-owned bank has been one of those that failed to pass on all the cuts, leaving its already struggling borrowers paying over the odds.


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