‘Bleak Assessment’ on U.K. Mortgage Lending

July 3rd, 2008 | Wall Street Journal

U.K. default rates and related losses on mortgage lending rose more than expected in the second quarter and are expected to increase further in the next three months, the Bank of England said Thursday.

In its quarterly credit conditions survey, the bank also said that demand for secured lending for house purchases had declined in the second quarter by more than lenders had anticipated in the first three months of the year.

Taken in concert with dismal services sector data, analysts said that the results of the survey further reduce the possibility of the Bank of England raising interest rates this year. The U.K. bank rate currently stands at 5%, following reductions in April, February and December.

Alan Clarke, U.K. economist at BNP Paribas, described the survey as a “particularly bleak assessment.” He said, “Just because the markets and central banks’ primary focus has moved more heavily towards inflation is not to say that households’ and firms’ experience of the credit crunch has passed its worst - rather the opposite.”

“Falling house prices are aggravating demand and supply of credit. The effects on growth are likely to persist for some time to come,” he warned.

U.K. residential property sales have slumped and prices have fallen in recent months as a tightening in credit availability spurred by concerns about losses in the U.S. subprime market led U.K. banks to hike their mortgage rates and reduce their loans for house purchases. Even though the BOE has cut its main interest rate by 75 basis points since December, mortgage rates haven’t fallen in tandem due to the greater difficulty associated with obtaining credit.

The poll found that a net balance of 47.3% of lenders questioned said that default rates on mortgage loans had increased in the second quarter, up sharply from 28.6% in the previous period. A net balance of 50.4% expected default rates to increase over the coming three months, higher than 40.1% in the BOE’s last poll. – Natasha Brereton and Nicholas Winning