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September 8, 2008

Negative equity could cost £38 billion in bad debt

by Gill Montia

Story link: Negative equity could cost £38 billion in bad debt

Bernstein Research is predicting that UK banks could have to write-off £38 billion in mortgage debt.

The Wall Street financial analyst is expecting Britain’s plummeting house prices to push one-fifth of the country’s home loans into negative equity.

By comparison, the 1990s housing downturn produced bad mortgage debts of around £12 billion but lenders are more exposed today because of the absence of mortgage indemnity guarantees, a form of insurance that covered a quarter of the losses from mortgage debt in the early 1990s.

The research firm expects property prices to fall by between 25% and 35% if the UK enters a recession that measures a 2% drop in gross domestic product.

In such a scenario, up to 1.3 million households or one in ten of all UK mortgages could fall into negative equity during the coming year and beyond.

The latest house price index from Halifax, the UK’s largest mortgage lender, put the annual decline at 10.9% in August.

In related news, HBOS chief executive, Andy Hornby, is predicting that UK house prices only begin to show signs of recovery in 2010 because lenders will continue to struggle with funding and adapt to new lending models that rely more on retail deposits and less on the money markets.

Should Bernstein Research’s forecast prove to be correct, HBOS would face the biggest losses from UK mortgage debt, with the analyst predicting almost £6 billion of write-offs between 2009 and 2011.

 

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