FSA warns 2.5m could face negative equity

The Financial Services Authority (FSA) has warned that if during this year house prices complete a 30% fall from their 2007 peak, around 2.5 million mortgage borrowers could end up in negative equity.

Around 500,000 of the total would be buy-to-let investors and the remainder homeowners.

Such an outcome would leave one in four mortgaged households and half of buy-to-let borrowers with mortgages bigger than the value of their properties.

In its Financial Risk Outlook report for 2009, the regulator suggests that negative equity on this scale could damage the wider economy as worried homeowners scale back their spending.

In addition, lenders would be at risk of further losses and write downs.

On this point, the FSA warns that lenders may be eager to possess homes before property prices fall further and could potentially treat borrowers unfairly.

In related news, the National Audit Office (NAO) has today published comments of the nationalisation of Northern Rock in a report which berates the Treasury for allowing the lender to continue offering high risk loans after it had been rescued by the Government.

The bank’s notorious “Together” mortgage allowed homeowners to borrow 125% of the value of their properties and according to the NAO report, Northern Rock was still offering this type of deal months after having been bailout out by the taxpayer, in September 2007.

The loans were responsible for a sharp rise in the lenders repossession rate last year and for the fact that falling house prices had left 33% of all Northern Rock mortgages in negative equity by the end of December 2008.

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