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Editor’s take: The mega-mortgage brigade should have seen it coming

At the risk of being eviscerated and dunked in a vat of scalding Asti Spumante (now that Bollinger’s out of reach), it’s time to say the unthinkable: bankers who find themselves suddenly unable to service enormous mortgage payments have only themselves to blame.

The Times last week produced an anecdotal portrait of a new phenomenon – the ‘poor banker’ with a 700k interest-only mortgage acquired in the go-go year of 2006 at a fixed rate of 5%.

The pauvre has made one capital repayment using his bonus. He has a credit card bill of 15k, no savings, school fees to pay, and wants to remortgage – at what will almost certainly be a punitive rate.

Mortgage advisors who deal with financial services professionals say this isn’t a million miles from reality.

Big mortgages, small deposits

“Virtually all investment bankers take their mortgages on an interest-only basis,” says Nigel Gifford, at Clegg Gifford private clients in Docklands. “Generally, most also prefer to use the smallest deposit possible.”

Melanie Bien, associate director at Savills Private Finance, says most of her banking clients who took out mortgages in the past few years geared up as much as they possibly could: “The more high flying types were not only relying on receiving quite big bonuses, but were pretty assured they were going to get them. Basic salaries were simply not enough to buy the kinds of houses they wanted.”

Needless to say, things now look very different. Last week, the Evening Standard estimated that 47,000 financial services jobs have now been chopped globally.

And today, the Financial Times says RBS is planning to axe 25% of the combined workforce following its merger with ABN.

In the current climate, even people who hang on to jobs are likely to struggle when it comes to servicing huge mortgage debts. Banks’ first-quarter results suggest total compensation for 2008 will be down around 15% at Morgan Stanley and Merrill Lynch, and down 35% at Goldman Sachs. Come the end of the year, zero bonuses are likely to be widespread.

The past is no indication of the future

Who’s to blame for the now painful predicament of Mr 700k Mortgage?

Some of the culpability must lie with mortgage providers, who were stupid enough to think that three years of big bonuses were an indicator of at least 10 more years of the same to come.

But most of the blame must lie with Mr Mega-Mortgage himself. This is far from the first time the banking climate has changed overnight. Nor is it the first time the mortgage market has taken a tumble on the back of exotic products (take the CMO crisis of 1994).

Anyone who thought their bonus for 2005, 2006 or 2007 was representative of the future, and who geared up heavily on this assumption, has now been proven wrong. Worse, they have been proven out of touch with market reality – which is hardly a great advertisement for their financial acumen, or a reason to employ or re-employ them on the kind of bonus which would help service the debt any time soon.

Comments (13)

  1. Yep. That’s the painful truth. As long as bankers and the rest of the world bought into the idea that ‘credit’ was a licence to unlimited spending, regardless of ability to repay, the idea that it was all really debt didn’t percolate. Now it is doing, with a vengeance. ‘Credit’ is a misrepresentation, a bit like the National Health Service, which is anything but. From here on in, ‘credit’ chez nous means actual positive funds in the bank that you can spend until they run out. Then you stop. Not the stuff proffered by all those banking institutions now taking a cold and dirty bath…

  2. I find it amazing how supposedly highly intelligent ‘high-flying’ bankers can be so stupid. I mean really, did they think it would last forever? When has it ever lasted forever? The average joe on the street is feeling quietly smug about the fall from grace that some of these guys are experiencing. I have absolutely no sympathy with them – now they are probably all laying bets on paddypower to try and renact that ‘buzz of the trading floor’. You should all be ashamed of yourselves.

  3. Ben, I agree up to a point. But the highly intelligent banker types get sucked in by a high-pressure environment and what is really a bullying and incredibly tribal culture. Their 700K mortgages will be because they are expected to live where the clan hangs out. Whoever heard of a successful banker living in Cockfosters? Or Dollis Hill? Tribal behaviour. And now the tribe’s paying for it.

  4. I didn’t know you could buy anything somewhere ok in London for 700K,must be Ops boys the article was alluding to.Back office is always first to be let go.Have a look at Vikram Pandit’s last announcement.

    Johnny LeBoeuf Reply
  5. Where is Cockfosters or Dollis Hill? Are they subprime locations?

  6. Unfortunately, those “high-flying” bankers pocketed obscene bonuses, while the rest got peanuts. And now that they have caused this problem, they will dissapear with their fat bonuses and we get laid off and struggle to meet our payments on our mortgages. I bought my property with a 15% deposit and relied on receiving a modest bonus (on a worst case scenario) to reduce my mortgage and in three years have a more manageable monthly payment. Not even a modest bonus did I see, despite having done well. Don’t generalise, as there are some very hard-done by zombies running around, while the fat cats (those gone and those still around) have nothing to worry about. I say they should be named and shamed.

  7. Johnny you must be joking. It’s always the expensive but now useless front desk guys that are let go first. Back office are needed to clean the mess left by you bunch of losers.

  8. I think you’re all a bunch of winging poms. You should not have bought into the property market in the first place…it’s been fuelled by ponzi finance since around 2004. What’s interesting is that the prudent folk who did not buy into the house bubble – on the expectation that it was going to crash – now watch as the BOE douche bags capitulate with the Banks and bail them out? That’s not market economics, its commy medalling. The market needed a complete cull to get rid of the useless Bankers making the bad calls and to get house prices back to planet reality. Also, I just want to state that this talk of 25% decrease is absolute rubbish – amazingly, it is EXACTLY the same kind of wishful thinking on the way down that was rampant on the way up…do people not learn!!! Let’s go and stick our heads in the sand! Seriously, the housing market could take a 60% decrease and you would be back to the long term average growth of house prices. That means a 60% drop would not be technically a crash, it would be …yes a correction!

    Joseph Schumpeter Reply
  9. The bottom line: All the medalling the BOE and FED are doing is going to exasperate this mess. The banks messed up. People could only see dollar sings when looking at property porn in weekend supplements. The market needs financial PAIN to work, to get people thinking strait again – to clear out the douche bags. The Fed and the BOE are dragging this one out. The BOE and the British Gov should have let Northern Rock go down. Would have sent the signal that the market needed – start acting like bankers or die. Instead they have rewarded imprudence. Batten down the hatches – there’s a black day on the horizon and it’s not going to be a Saturday or a Sunday…

    Joseph Schumpeter Reply
  10. Joseph, there are times when markets fail and when the authorities have to step in. To say that the BoE and Gov should have stood by and let Northern Rock go bust is incredible. The contagion effect would have been monumental. Market correction is one thing, financial crisis and failure in the banking system is something different altogether.

  11. The only people who like bankers are… bankers. Good to see that finally many are now starting to realise they are not gods. Hope you all loose your homes and your wives divorce you because you can no longer afford to pay for there weekly 200 vists to the hair salon or their daily high noon teas with the other b(w)ankers wives.

    Eat Pain and DIE!

    Public Servent Reply
  12. With a better dictionary / brain, you could have made in to a bank as well Public Servent. Somehow I don’t think you’re a professional!

  13. Interesting.

    There are a lot of misconceptions, on both sides of this debate, that are taking it off course a little.

    There are only a relatively small number of senior executives/top performers, along with a similarly small number of hedge fund/p.e. players that are taking home the biggest pay packets (measured in 7 figures+). Thereafter there are a lot of people with mid-high five figure salaries, and (a range of) six figure bonuses. Some of these people are the ones who are at risk, particularly those who have tried to compete with the aforementioned “top” earners for property in Chelsea, Holland Park, Hampstead etc. However there are a lot who have gone into other SW postcodes (Wandsworth, Clapham) or Essex… the former has seen enormous capital appreciation, and places in the latter weren’t that expensive to begin with! Either way, the people living there aren’t going to be squeezed out overnight, and to think they have every last penny tied up in their mortgage debt obligations is laughable.

    Some of the spiteful/jealous comments posted on here surprise me, Public Servent [sic].

    spot n forward Reply

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