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.