How House Prices are affected by tax rate cuts

These are interesting times. The entire world is struggling with the global economic meltdown, subprime mortgage crisis, banking meltdown and so on. It’s interesting time to learn.

Here is an example of how the house price may be affected by interest rates or tax rates. What impact can a tax rate have on house prices.
The UK Chancellor, Alistair Darling is expected to prevent a cut in the capital gains tax (CGT) because there are fears that a tax rate cut may spark a second-home boom, which might make the housing unaffordable to many.

There are strict warnings from a few that property and mortgage market speculators will use the tax reduction to drive up the price of rural housing, making it unaffordable for the common man, who really need a housing shelter more than a speculator. They spoke out after Stuart Burgess, the Government's Rural Advocate, urged the Chancellor to scrap the reduction in CGT on second homes from 40 per cent to 18 per cent.

The Campaign for the Protection of Rural England (CPRE) warned the move could squeeze more people out of the housing market. Kate Gordon, a CPRE spokesman, said: "Property in rural areas should go to people in housing need. There is a large shortage of affordable housing at the moment. Reducing this tax will lead to a wave of speculation and it could fuel further price rises.
"The Chancellor needs to assess the implications of these changes and we are not sure he has thought this through properly."
Tim Farron, the Liberal Democrat spokesman on the countryside, said: "While taper relief was unfair and regressive, the new system still taxes income at a lower rate than capital. This will further encourage the wealthy to invest in second homes, which will badly affect many rural areas."

It is difficult times for the world economy and UK cannot stay behind. However, these tough times prove to be good learning opportunities about how we should look at the markets, whether they are stock markets, bond markets, house and mortgages, loans, etc. These are the times when big shots sitting in the government are expected to deliver and take necessary actions. Hope to see these problems going away soon.

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Mortgage Repayment: Default Rate 1 in 5 expected on fear

Yesterday, the US dollar went to a record low against Japanese Yen, which triggered a mayhem in the global stock markets. Today, the UK has come out with another interesting but dangerous observation. One out of five UK mortgage holders is concerned and worried about meeting their obligations to repay their mortgage loans in the next 1 year. This report was disclosed as per the FSA or the Financial Services Authority.
And interestingly, almost a quarter of those do not have any plans for dealing with the issue, the poll for the financial regulator found.

Already, the repossession of UK homes for mortgage defaults is at its highest since 1999.

However, the survey conducted by FSA was small, only around 570 people took part in that survey.

But it does give worrying indications about the citizens of the country, their concerns and fears about the mortgage markers. The consumer confidence is at the record bottom. The FSA is sufficiently concerned about the situation that it is launching a £2m advertising campaign and an advice guide for homeowners.

The FSA is concentrating its campaign on householders whose fixed-rate deals are coming to an end this year.
The FSA has published a new guide to help people manage their mortgage in preparation for some difficult times. The checklist provided in the guide suggests that people should check their budgets and consider seriously about how they would cope if their mortgage payments increased significantly. It also advises that homeowners start looking at their options well in advance of their current deal coming to a close.

For those already seriously struggling, it says that they should not panic but should talk to their lender and seek free, confidential advice from an independent debt advice agency.

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UK House Price on decline: Mortgage falls

The mortgage markets in UK are not willing to take a respite. It has been 5 continuous months of decline in the House prices – they fell for the fifth month in a row during February. However, there were some positive signals that housing demand is beginning to increase due to the lower interest rates.

As per the news, the average price of a house in Wales and England went down by approximately 0.2% during the current month of February to around £175,000, according to property information business - Hometrack.

The yearly inflation rate for house price continued its downward journey to come at just 1.4%, which is its lowest level since April 2006.

But Hometrack said that despite the continued weakness in underlying prices, there were signs that demand was improving, with the number of new buyers registering with estate agents increasing by 7.9% during the month, compared with an 11.5% fall in January.
The group said there was also a slight rise in the number of sales agreed, which contributed to February's price fall being lower than the 0.3% slide seen during each of the previous two months.
The figures come after property website Rightmove reported a 3.2% jump in house prices in England and Wales in the four weeks to February 9, although it said some of the gain was due to market distortions following the final roll-out of the Government's controversial Home Information Packs.
Hence, there has been a modest growth in the registrations of new buyer which is being taken as a proof of increasing and firm demand, but it is backed largely by the recent interest rate cuts across the globe, with London and the South East registering the largest increases in demand.

At the same time, the rise in buyer numbers was met by a similar increase in the number of homes coming on to the market, whereas during the past the growth in demand has outstripped the increase in supply.

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Morgan Stanley job cut: lays off 1000 mortgage employees

In a first ever open move, the big financial institution, a Wall Street biggie, Morgan Stanley has declared that it is firing 1000 people from it mortgage jobs business segment. The move is done to cut down its US home lending business and will also fire some employees from a British Mortgage unit, an arm of Morgan Stanley.

The management has defended its decision by claiming that the job cut by Morgan Stanley was an effect of the deteriorated situation of the mortgage markets.

Who will be affected?
The Morgan Stanley Home loan or mortgage business employees who generate mortgage or home loan business from brokers or other parties as intermediaries, will be shown the door. Then there are some other bankers who would be involved in a kind of “securitization” or packaging these loans into bonds, will also face job cuts by Morgan Stanley. Including this one, Morgan Stanley has laid off a total of around 2,900 people in mortgages, wealth management, investment banking and capital markets since October 2007. This constitutes around 6% of the total Morgan Stanley employee strength.

After the job cuts, Morgan Stanley has now joined well over 100 mortgage lenders that have slashed jobs or gone out of business in the last year as the housing crisis deepened and credit conditions worsened. Last year, it was Lehman Brothers who had cut 1300 jobs in the mortgage division.

This is a clear sign that the major investment banks and financial institutions are not seeing a sooner end to the mortgage crisis in US and the other developed countries. Obviously the ripples will be felt by other emerging countries as well, on a global basis.

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Fed to Unveil Mortgage Help Plan with Six US Mortgage Lenders

The mortgage markets in US are on the verge of a complete collapse. Due to the subprime mortgage crisis, the home prices are falling, so even some people with good credit ratings are having tough times as they have been left behind on their mortgage payments. Similar to many subprime mortgage borrowers, these people with good credit ratings signed up for adjustable-rate mortgages that allowed them to make smaller initial payments for first few years and later a fluctuating interest rate. Unfortunately, the “later part” that has come in now, is having a HIGH and fluctuating interest rates, which are translating into a higher repayment each month for the mortgage.

Some other “smart” borrowers borrowed mortgage loans against their rising share holding - believing that they will be able to keep up with the mortgage repayments with the “ever rising” shares prices before the higher payments began. Even in the worst case, they had assumed that the prices of the house they have bought will be sufficient enough for repaying the mortgage. But as prices have plummeted, many homeowners now owe more than their home is worth, and banks have tightened their lending practices, leaving even people with good credit ratings struggling with higher payments.

This is what happens when we thing that the entire picture is looking very rosy and goody-goody, so let’s dive in. Everyone else is taking a loan, so should I. Everyone else is buying a house, so should I. My salary will continue forever, I work for MNC.

Highly costly assumptions – leading to tremendous debacles.

“You don’t mind making a $2,000 payment when the house is going up” in value, said Steve Walsh, a mortgage broker in Scottsdale, Arizona, who has seen several clients walk away from their homes because they couldn’t refinance or sell. “When it’s going down, it becomes a weight around your neck, it becomes an anchor.”

Fortunately, the government in US is working on this issue. Just yesterday, it had declared a Tax Rebate or Tax Refund. The Hope Now alliance, which includes lenders, investors and nonprofit groups, has helped around 8 percent of subprime borrowers in the last 2 quarters of 2007 — more than its original estimate. Bank of America, Citigroup, Countrywide Financial, JPMorgan Chase, Washington Mutual and Wells Fargo, which form the Hope New Alliance are expected to announce on Tuesday at the Treasury Department that they will offer both prime and subprime borrowers who are more than three months behind a chance to halt foreclosure proceedings for 30 days and work out new loan terms. The same is cited under the name “Project Lifeline”, where the above mentioned six US banks are willing to help possible mortgage defaulters.

I wonder if something similar collapses in India – what will happen?

Will the Left backed Indian government running on the support of so many parties come to the rescue of its citizens?

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Six US banks join hands to avoid mortgage defaults

It’s all happening in the US. The Subprime mortgage bug is not leaving the US easily. Six of the top mortgage lenders, which include big names like Bank of America, Citigroup and other four mortgage lenders have decided to come together and help chalk out certain steps to help the mortgage borrowers who face the bad situation of default on their mortgage repayment.
They are expected to work together on certain points, providing a guideline to mortgage borrowers, so that the borrowers may not have to vacate the house for want of repayments.

The plan is called “Project Lifeline” offering. The companies met with Treasury officials over the past week to discuss ways to encourage homeowners to get in touch with their mortgage servicers. The move is coming due to the mounting pressure from the US treasury. News is that JPMorgan Chase., Wells Fargo, Washington Mutual and Countrywide Financial may also participate in this offering. These all six are the group members of a strategic alliance called “Hope Now”, that was formed last year, to avoid a spring up of foreclosures in the mortgage lending markets of US.

The estimates are that around 2 million mortgage owners face the problems with the mortgage due to higher mortgage rates and inability to repay them. Prevention is better than cure – good to see that the debt ridden banks and lenders are taking proactive steps to curb the problem. Hope that this end up in a helpful way instead of again pushing the mortgage borrowers in trouble!

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UK Home Repossessions: Highest since 1999

The latest data figures released by the CML or council of Mortgage lenders indicate a disturbing sign in the UK real estate markets. Look at the graph below (source BBC), which indicates the no. of homes repossessed by the mortgage lender or mortgage company because the borrower was unable to repay the loans.



The graph clearly indicates that there has been a consistent rise in the repossessions since 2003 and it is at its highest levels now. Not only that, the current set of mortgage borrowers, a significant number of them are reported to be repaying their mortgages using Credit Cards – which means taking one credit to return a previous one.

The mortgage lenders are directing the issue to higher cost of living, higher amount of bills that people have to pay and high cost of food as well. No wonder why living in a city like London requires a fortune – simple things like moving around in a car in central London forces you to pay heavy congestion charges. The recently released US consumer spending data appears no good either.

Anyways, the data is no way a good indicator of the economy. If this is the state of a so called developed country, how about the so-called emerging economies like India & China?

Banks in India are learnt to throw away loans to anyone and everyone. Then to “recover” the loans, they need to hire “recovery agents”. Things with such data are definitely no good. Emerging economies are still highly dependent on exports to the developed countries.

China for electronics, etc and India for manufacturing & software exports. If the developed economies face such a situation where they find their consumers spending less and less, it is but obvious that the emerging economies will suffer. The picture emerging on the global front is definitely not that of convenience, where one can simply play around with his investments. It may take a long time before this depressing situation gets away with and the economy returns to normalcy.

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UK Rate Cut: Mortgage lenders cut mortgage rates

Following the US Fed decision to cut the interest rates big time, the Bank of England has followed suit. The UK based Bank of England has also cut the interest rates by 25 basis points or 0.25%.

The mortgage lenders in UK are pledging that the rate cut will be passed on to the customers but it may take some time. So if someone has a mortgage of value £100,000, his obligations will reduce by around 16£ per month or £192 per year.
However, 55% of UK mortgage borrowers are on fixed rate mortgage, so there will be less impact of this 25 basis point rate cut in UK. There will be rate cuts for other types of mortgages like Tracker Mortgage, but the cut may be less than 25 basis points.

On the other side, the effect of rate is is compensated by other developments in the UK mortgage markets. It is learnt that two of Britain's biggest mortgage lenders, Alliance & Leicester and Britannia building society, have doubled the minimum deposit demanded from first-time buyers in the latest sign that banks are anticipating a downturn in house prices.

This is the second such rate cut announced by the Bank of England in last 3 meetings. Though the economic analysts have warned that there was unlikely to be further relief for homeowners in short term, despite evidence of a weakening economy, given the Bank's warning yesterday about inflation. All this is leading to only one single destination- the world economy going into a major recession. No doubt, the world is a global village, and everything moves in sync!

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Egg Card Withdrawal – Cardholders angry at Egg card’s decision

After the collapse of so many leading banks in the subprime mortgage crisis, followed by scams being unearthed at SocGen, following the closure of BNP Paribas Hedge Funds, following the Fed rate cut, following the selling of UK based mortgage lending banks like Northern Rock, It’s time now for the Credit card companies to show their skills.

UK based Egg Credit Card, which was bought over by the US based Citibank group in last May, has withdrawn their credit cards from the so-called “RISKIER” customers since immediate effect.. A total of 161,000+ Credit Cards issurd by Egg have been revoked by the issuing bank.
The move marks another example of how banks are revising their lending criteria amid the credit crunch. It was sometimes during the last week, when the FSA or the Financial Services Authority, the watchdog of UK financial systems had declared that UK banks face their toughest times since the 1990s, all owing to escalating consumer defaults.

The customers affected will not be able to use their Egg credit card once the notice period has ended, although they can continue to make minimum monthly repayments or pay up in full.

Interestingly, the Egg card is now owned by US based Citibank. Another interesting point about Citibank is that last week, it has suddenly closed down several of its ATM in prime locations in the financial capital of India, Mumbai. Already, Citibank is facing tough times owing to the global meltdown and problem with their lending business.

Who are these riskier customers of Egg card?

UK people have filled up complains on internet message boards about Egg being unjustified to them. They claim that even people who pay their bills on time, ultimately meaning “No income for the card company” have been sent notices to terminate the credit cards. It’s all happening in the markets across the globe and the banks are the ones who are being hit the hardest. Especially those in the lending and borrowing business. Already Northern Rock is being sold out, and no wonder why the credit card companies, who used to send agents after each individual to sell a “FREE CREDIT CARD” are now cancelling the credit cards of customers who are loyal to them and pay the bills on time. Keep watching, loads to happen – it’s a RANDOM market.

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Northern Rock Bank Up for Sale: Bid deadline today 4th February

Northern Rock is a famous mortgage bank of UK. However, following the mortgage market meltdown in the past year, it is now to be sold out. It was one of the favourite banks of the UK citizens for taking easy mortgages or loans for buying properties like house, home, business, etc., but today it is up for sale.

Northern Rock landed itself into financial distress because of its incorrect business functions and models which had no room or preparations for what we know as the global credit crunch.

Unlike the other UK based banks, Northern Rock had devised the business model upon borrowing funds from the wholesale money markets to carry on or run its mortgage business, rather than the usual method of using the deposits of the savings account money which people leave to the banks in their savings account. Borrowing such money from wholesale money markets is not only costly, but also risky, as it does not have any backup for repaying the debt that the bank borrows.

Yet after the subprime mortgage crisis in the US which had the global effect, Northern Rock suddenly found it could not secure the cheap funds it needed, as credit was either unavailable or was found to be more expensive.

As the first emergency loan from the Bank of England was announced, thousands of Northern Rock savers rushed to withdraw their funds, before the government's pledge to guarantee all savings. This caused mayhem in the banks money, as saving bank account holder had withdrawn their money and bank was left ailing with less cash, despite the help or emergency aid from the Bank of England.

Now, the FSA or the Financial Services Authority (like that of RBI in India and Fed in USA), is being criticized for not keeping a close eye on the way the bank was functioning. As per the news, Northern Rock's senior managers were most at fault, it also blames that the FSA was guilty of a "systematic failure of duty" in not preventing the bank's "reckless" business plan.

It’s up for sale now. Sir Richard of Virgin Atlantic has already confirmed that Virgin aims to meet the deadline, and is said to be the frontrunner. Along with him, 2 more bidders are expected to be interested in the buying the bank. Under the sale to a private buyer, the government intends to turn the £25bn of Bank of England loans - essentially taxpayers' money - into bonds, which will then be sold to investors. It is not yet known when the government will announce which bid for Northern Rock has been successful.

People who believe that banks which are in the business money savings and money lending or are aggressive in the real estate loan markets, should think again. We have already seen the fate of Global Trust Bank. Recent news was about the losses reported by French bank Societe Generale or SocGen, saying that one of its traders did a scam. All those are affected are the shareholders of the bank.

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