Nationwide Brings Back the Dreaded 125% Mortgage

Nationwide, the world’s largest building society, is now bringing back the dreaded 125% mortgage. While the lender claims these mortgages are a “niche product” designed for customers of Nationwide in negative equity, the Financial Services Authority (FSA) is looking to ban this type of lending.

From the BBC:

It will only be available to existing customers in negative equity who want to move house.

Negative equity means that the value of someone’s home is less than the amount they owe on their mortgage.

Nationwide said the deal was a very "niche offer" and that not everyone in negative equity would qualify.

The Financial Services Authority is considering limiting mortgage loans to 100% of a property’s value.

‘No more risk’

The Nationwide only offers new customers mortgages worth 85% of the value of the home they want to buy.

Under its new arrangement, borrowers would take out a loan for 95% of the value of their new house at a fixed rate of 6.73% for three years or 7.48% for five years.

They would then be able to add on the negative equity from their old home, up to another 30% of the value of the new property, at a higher fixed rate of 7.23% for three years or 7.98% for five years.

Now, this is a different product than the one being sponsored by the U.S. government ( see posts on that here and here). In the U.S., the 125% mortgage only applies to the refinancing of mortgages of existing properties. Here, the Nationwide is offering to fund 95% of the new house purchase, plus up to 30% negative equity from a previous residence.

While I am sceptical about the rationale for this product, it is quite innovative. First, the negative equity portion carries a higher rate than the 95% mortgage. Moreover, loan exposure for Nationwide probably won’t increase because these deals are for existing customers. And, Nationwide seems to have found a way to get more house transactions in a climate where prices have been declining.

To my mind, the 125% product offered by this building society shows how innovative the financial services industry can be in any investing or economic climate. However, products like these operate on the fringe of what should be considered prudent. I see it as further evidence that the financial services industry needs strong oversight to prevent lenders from taking on too much risk and creating the kind of financial crises we have experienced.

Comments

[TradingHelp...:]

Innovative yes, necessary probably, but very sad that so many home-owners lost out and are in negative equity. It's also interesting that a building society is offering the product rather than one of the banks part-owned by the UK government.

One last observation. The 7% plus interest rate. Ouch. The BoE rate is only 0.5%. That is painful and a reflection of the true risk Nationwide sees in this market.

Jul 09 10:44 AM

[SoCalGal:]

This is what happens when financially unsophisticated bloggers like Edward Harrison opine about matters they know nothing about.

This product is essentially an unsecured loan at 7%. The consumer is getting a deal! The lender is taking a calculated risk--and pricing that risk accordingly--that the value of its collateral, which at this time is essentially the same as that of a credit card, won't remain compromised for long. This time they're paying attention to the cyclical nature of real estate. Rather than adding to its woes, the lender is re-evaluating its balance sheet and figuring out a way to limit its write-offs. Under some circumstances in particular--such as when a homeowner has done a cash out refi--the homeowner is morally obliged to repay the lender, so this is a way for him to do that without the lender resorting to credit card rates.

Jul 10 12:36 PM

[John Lounsbury:]

SoCalGal - - -

I would approach your comment with a better predisposition if you avoided the gratuitous insult of the author. After reading your comment, I can not see how your views (with which I agree) contradicts anything the author said. You offer some different aspects of the discussion, but you are not in opposition to what the author wrote.

I do not believe that SA should be used as a peeing contest about professional qualifications. If it were, I would not dare to engage in comments with chaired professors, as well as IMF, government agency and private sector executive level economists. I see SA as a great opportunity for all, even the most credentialed, to gain additional perspectives on the economic, financial and investing world, even in areas in which they are world experts.

Finally, anyone who wants to engage in confrontation about qualifications, should not start down that road without posting their own profile. You may be a mortgage brokerage expert (that is the web site you referred), but simply posting that web site does not constitute full disclosure of your professional qualifications.

I hope that you recognize, I am not criticizing your comment. It's more like a criticism of someone like Michael Jordan if they were to engage in public trash talk. It simply detracts from the value of their game play.

On Jul 10 12:36 PM SoCalGal wrote:

> This is what happens when financially unsophisticated bloggers like
> Edward Harrison opine about matters they know nothing about.
>
> This product is essentially an unsecured loan at 7%. The consumer
> is getting a deal! The lender is taking a calculated risk--and pricing
> that risk accordingly--that the value of its collateral, which at
> this time is essentially the same as that of a credit card, won't
> remain compromised for long. This time they're paying attention to
> the cyclical nature of real estate. Rather than adding to its woes,
> the lender is re-evaluating its balance sheet and figuring out a
> way to limit its write-offs. Under some circumstances in particular--such
> as when a homeowner has done a cash out refi--the homeowner is morally
> obliged to repay the lender, so this is a way for him to do that
> without the lender resorting to credit card rates.

Jul 10 02:31 PM

[Edward Harr...:]

John, you are right that, despite the gratuitous insult, I do agree with SoCalGal. The Nationwide proposal is a lot better than the 125% FHFA proposal. They are dealing with customers with whom they already have a lending relationship and the interest rates rightly reflect the extra risk from having an unsecured loan for the previous negative equity portion.

You have seen my FHFA post and obviously I see that program in a vastly different light. I should also point out that Nationwide has explained this program and I posted their explanation on my site:

www.creditwritedowns.c...

Nevertheless, as I indicated, this program operates on the border of what should be considered prudent lending and gives me great pause as to whether Nationwide is taking too much risk. Time will tell.

In the end, oversight on programs like this is critical because lending more than 100% LTV is a practice not to be encouraged, especially for systemically important institutions like Nationwide.


On Jul 10 02:31 PM John Lounsbury wrote:

SoCalGal - - -
After reading your comment, I can not see how your views (with which I agree) contradicts anything the author said. You offer some different aspects of the discussion, but you are not in opposition to what the author wrote.

Jul 12 04:42 PM