Shock rise in mortgage defaults in 2011

Julian Harris
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MORTGAGE defaults have unexpectedly shot up in the first three months of the year, the Bank of England revealed yesterday.

A positive balance of 11.5 per cent of respondents to the Bank’s credit conditions survey reported a rise in defaults on secured loans to households.

Worse, even more – a positive balance of 14.3 per cent – expect defaults to increase over the next three months.

“In the 2010 fourth-quarter survey, lenders had expected the default rate on secured loans to households to stabilise in 2011 quarter one, after having fallen during 2010,” the Bank said.

“Some lenders commented that they expected falling house prices to exert upward pressure on losses given default in the coming quarter,” it added.

However, credit conditions are likely to ease over the next three months, with lenders keener to offer mortgages, even to borrowers with small deposits, the survey said.

Lenders increased the availability of home loans to those with deposits of less than 25 per cent of a property’s value in the first three months of the year, the data showed.

“Lenders expected that they would continue to increase availability to borrowers with high loan-to-value ratios over the next three months, as well as increase maximum loan-to-value ratios a little,” the survey said.

While demand for mortgages continued to fall into the new year, only a small net balance of lenders anticipate that it will fall any further over the second-quarter of the year.

“It is slightly disconcerting to see default indicators weakening now -- not least when coupled with signs of loosening lending standards,” said Michael Symonds, a credit analyst at Daiwa Capital Markets.

“The relatively robust asset quality performance of residential mortgage portfolios through the recession has provided good support to the credit profiles of UK banks over recent years,” Symonds added.

“We will watch closely for further signs of deterioration.”