Mortgage Withdrawals Driving UK Consumer Spending, Also

Mew_uk_20070923We have, for several years now, highlighted the significance of Mortgage Equity Withdrawal (MEW) in the U.S. as a major source of consumer spending.

As MEW slows, so too will consumer spending.

It turns out that this phenomena is not limited to the U.S.: In Great Britain, where nearly all mortgages are adjustable APRs, MEW has been a major source of fuel for their consumer spending.

From Monday’s WSJ:

"In the past decade, U.K. consumers have become more
dependent on borrowed money, both to buy homes and to finance spending.
As of July, total mortgage debt in the U.K. had reached £1.1 trillion
($2.2 trillion), more than double the level of 10 years earlier and
equivalent to more than 80% of annual gross domestic product. In the
first quarter of this year, U.K. homeowners tapped their home equity
for about £13.2 billion, or 6.1% of disposable income, an indication of
how much rising home prices have been raising consumer spending, which
makes up about two-thirds of the U.K. economy."

Of course, this only gets discussed once there is some sort of a disaster — and in the UK, that disaster is Northern Rock:

"Perhaps no
company symbolizes the borrowing boom better than Northern Rock. In the
late 1990s, the company became a pioneer in the securitization of U.K.
mortgage loans, packaging thousands of loans into pools and selling the
cash flows as securities to investors in the U.S. and Asia.

By tapping capital markets rather than relying solely on typical
deposits, Northern Rock was able to expand at great speed. By June, it
had about £87 billion in mortgage loans outstanding and had accounted
for almost a fifth of new mortgage loans made in the first half.
According to brokers, Northern Rock gained market share in part by
taking risks — allowing home buyers, for example, to get loans
covering as much as 90% of the purchase price.

Their mortgages "were prime, but they were operating at the outer limit
of it," said Howard Cook, a partner at Talbot Insurance Services, an
independent financial adviser in Cumbria, in northwestern England. A
Northern Rock spokesman said the credit quality of the company’s loans
was solid, and that the percentage of loans in arrears was well below
the industry average."

There you have it: Sub-prime mortgagees, high LTV, below industry average loan quality. Gee, how could that strategy ever go wrong?


Northern Rock May Point to U.K. Crunch
WSJ, September 24, 2007; Page A2

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