Mortgage Rationing on the Way

Rob Mackrill - Fri 04 Apr, 2008

The Bank of England warns that mortgage rationing is on the way

Fear and greed.

That financial markets are driven by these two instinctive sentiments is news to no one with at least a passing interest in the subject. But it’s one thing to register the truism another to appreciate the potency. Times of crisis such as these provide some choice examples; HBOS plc, one of the UK’s largest banks, for one.

The banking and financial services giant, with some 72,000 souls under its wing, saw its shares crippled one morning in a bear raid stoked by rumours of funding problems. Those behind the whispering were deemed to have a cynical vested interest at heart. No, really? It certainly riled the regulator against the short sellers. Whatever the motive the impact of rumour on professional market minds turned feverish in mad markets was briefly impressive. A 20% fall at one point in a morning.

Fear got the better of Bear Stearns too thinks CEO, Alan Shwartz. He laid the blame for the sudden demise of 85 years of investment banking on “short sellers and “market manipulators” as it “suffered an evaporation of confidence fuelled by falsehoods,” according to a Guardian report. Though some, ourselves included, might point to the fact they were up to their necks in the subprime swamp might have had something to do with it. Whatever the reason, the Bear died on a single fateful day when the lifeblood was leeched out of it. On March 13, $10bn was sucked from the company by panicked investors. At the end of the raid over $12bn in cash resources had dwindled to $2bn. It proved a mortal blow.

"As an observer of the markets, it looked like more than just fear. It looked like people wanted to induce a panic," Schwartz told a senate finance committee in Washington.

So there’s fear...and there’s its exaggerated form: panic. I guess it’s one grade of emotion to see a tsunami coming from a distance. A more intense one when it crashes on the beach and you’re still in the sun lounger. The fight then is not one of rational avoidance but visceral survival. At such times the pin stripe suit and the Ivy League finance MBA provide little protection as normally civil behaviour reverts to something more primal.

Still, to investor fashionistas, fear is the new black - and they come none blacker than the credit markets. Unless frozen credit markets start moving soon, the credit crisis will reach a new intensity said Paul Tucker, Bank of England’s Head of Markets. “The process of deleveraging the financial system is not complete. The credit crisis is worse than two months ago and threatens to turn into a vicious cycle.”

Even the proverbial Man on the Clapham Bendy Bus has noticed. Mortgage and remortgage deals are either getting more expensive and restrictive or, worse, disappearing altogether. The Bank of England warns that almost half of the UK’s lenders are preparing to “ration” mortgage deals over the next three months, reports the Telegraph. Middle England is cutting back on spending as recession fears take hold, reports a survey by insurance group Axa; as credit reference agency, Experian, warns more than 5m people could run into serious financial difficulty.

But as the UK consumer braces for hard times, the clouds seem to be lifting a little for some in the more forward looking financial markets. Edward Menashy, economist at Charles Stanley, feels “definitely less gloomy” as credit markets have “recovered somewhat”. Well, LIBOR has now dipped a bit under 6%, according to Bloomberg, but there looks to be some way to go...

*** Back to basics. Commodities. That commodity prices have continued to rise as the US has headed into recession “makes no sense to me” said Unicredit economist Marco Annunziata yesterday. He sees prices stabilising from here. Meantime the long commodity price boom for everything from industrial metals to agricultural staples is giving rise some quirky economic side effects.

“Some homes are worth less than their copper pipes”, reads a Reuters headline. It reports an emerging trend of thieves ripping up the plasterwork in derelict homes to steal the valuable metal.

Closer to home, a new kind of robber alchemist (turning lead into gold?) appears to be at work on English churches. With the price of lead having risen sevenfold in the last six years, the churches’ lead roofs have become popular targets for thieves. One church in Leicestershire found itself with 100sq ft hole in the roof, reports the International Herald Tribune.

Meanwhile for resource-rich countries, the bounty of ‘Chindia’s’ industrialisation is helping transform economic fortunes. One time banana republic Peru has just had its foreign currency debt rating upgraded by Fitch to investment grade on a par with India and Croatia, as commodity exports including oil, copper, gold, zinc and coffee boost revenues and strengthen its ability to repay debt. Peru’s improving fortunes are old news to any adventurous investor who has been keeping tabs its stock market in recent years. The Lima General stock index has risen about ninefold in the three years to mid 2007.

Finally, ex-media mogul and s o called “Mouth of the South” Ted Turner, who set up CNN, knows how to make the news.

If we don’t get a handle on global warming says the billionaire “we’ll be eight degrees hotter in 30-40 years and basically none of the crops will grow. Most of the people will have died and the rest will be cannibals.”

And there we were worrying about a trifling credit crunch.

Regards

Rob Mackrill
The Daily Reckoning