Banks Facing Commercial Property Meltdown

(BBC) – AT THE HEIGHT of the property boom in 2006, Shrewsbury’s shopping centre was sold for £118m with only six of its 135 units lying empty.

The value of shopping centres had soared as money poured into commercial property.

Four years and one slump later, 29 units are empty in Shrewsbury’s centre which was sold last month at a price believed to be half of the 2006 figure.

All over the UK, negative equity is now widespread in the whole of the commercial property sector – one informed estimate says it could be as much as £50bn.

In the case of shopping centres, it is now common for centres to be worth less than the cash loaned by banks to allow the owners to buy them during the boom.

“£10bn worth of shopping centres are capable of being put into receivership, should the banks so wish,” said Mark Williams, of consultancy DTZ, who charts the buying and selling of shopping centres for BCSC (British Council of Shopping Centres).

He added: “That is one in five shopping centres in the UK.

“I’ll stress we don’t think the banks will put that volume into receivership.”

According to property consultant Andy Lamb, negative equity loans are so prevalent there is even a brand new jargon term in the business, the ‘Scooby loan’.

Mr Lamb said such loans refer to companies who re-financed their loans when the market rose but found themselves in negative equity when it fell.

“The income is just about servicing the debt….the loan and the loan values are completely underwater and that is called a scooby loan,” he said.

“What it means is a scuba diver i.e. he’s underwater but he’s still breathing, just!

“Because he can meet the interest payments, all other banking criteria are shot to pieces.”

William Newsom of property consultancy Savills has been trying to estimate how much negative equity there is in British commercial bank loans.

Basing his research on six monthly data compiled by DeMontfort University Leicester, Mr Newsom estimates a figure of £38bn worth of negative equity on investment properties. But this could rise to £50bn if the drop in land values on development property is considered.

“It is enormous,” he said, “but it could be significantly more.”

“It has never been seen before to this order of magnitude. It is 25% of the entire lending book in round terms.”

Such losses would devastate the balance sheets of the banks who offered the loans, according to Mr Newsom, who says banks are doing all they can to help under-pressure borrowers keep afloat.

The alternative is that if the company goes bust, the losses on the loans will turn up on the bank’s accounts.

“There a lot of banks out there who are burying their heads in the sand and not admitting the extent of the problems that they have, for obvious reasons,” said Mr Newsom.

But the British Bankers’ Association rejects claims bankers are hiding their losses.

“UK banks are subject to one of the most open and robust accounting regimes in the world and the full extent of their liabilities is open for everyone to see when they publish their accounts annually.”

The association added: “Banks make commercial decisions about the loans they grant and the repayment terms they impose. They lend based on the ability to repay.

“For large scale commercial property deals terms and conditions are individually negotiated and unique to that project.”

Banks have been renegotiating loan terms and extending loan periods hoping that the problems would be resolved in what is known as “extend, amend and pretend” or “delay and pray”.

Conor Downey, a specialist banking and commercial property lawyer with city firm Paul Hastings said not all loans could easily be extended.

During the boom a large number of so-called securitised loans were issued for property investors, and he said they were far less flexible.

He warned that a spate of forced sales was likely when these complex loans mature in the next two years.

“It is estimated there are 150 of these transactions across Europe, and about half are British.

“Each one runs to hundreds of millions of pounds in some cases billions,” he said.

He said securitisations accounted for between 15 and 25% of all property lending at the peak of the market.

As the number of these forced sales grows this will further depress prices in the commercial property sector making it harder for banks to cover their losses, squeezing the cash they have available to lend to businesses.

“Banks are required by government to maintain certain amounts of cash….to protect them against the risk that a very large amount of their investments go bad.

“As these loans go bad the amount of capital they have available to the banks will decrease unless they can raise it again on the markets so in the long term it will reduce the ability of banks to make loans at the same levels as they have historically,” said Mr Downey.

Economist Roger Bootle said banks were in a double bind, “I think it looks pretty bad whatever they do.”

He added, “I don’t think there is any way the government can dig the banking sector out of the difficulties with regard to commercial property whatever happens.

“There have been some pretty duff loans, the banks are going to register some pretty nasty losses and it’s not really a big surprise because it was a massive boom stroke bubble and someone’s got to pick up the tab.”

Bank Loan Rates Hit 9 Year High

(Telegraph) – BANK PERSONAL LOAN RATES have climbed to a nine-year high due to a rise in borrowers failing to meet their repayments.

Experts said banks are increasing rates to recoup the losses stemming from loan defaults.

Rising unemployment during the recession saw households struggling to meet the repayments on their loans.

The best rate currently available on a three year loan of £5,000 is almost 9 per cent – or nearly £160 – a month, according to personal finance website Moneyfacts.

It is in sharp contrast to rates of almost half that amount before the beginning of the credit crisis in 2007.

The rise comes despite the Bank of England keeping interest rates at a historic low of 0.5 per cent for the past year.

Rates were last at their current level nine years ago when the Bank Rate was a much higher 6 per cent, meaning banks have significantly increased their profit margins on personal loans.

Michelle Slade, a spokesman for said: “Unlike on a mortgage, there is no security that a personal loan debt will be repaid.

“In such a risk adverse market, lenders are only offering loans to the most creditworthy applicants and then at a premium.”

She added: “The post-Christmas loan sales that we see each January did not materialise, a further indication that lenders do not want to encourage unsecured lending.”

“Unemployment remains high and when people are struggling to meet repayments, unsecured lending is one of the first debts they stop repaying.”

Alliance & Leicester is currently offering the best deal on a three year £5,000 loan at a rate of 8.9 per cent, with monthly repayments of £157.97, while the best rate four years ago was 5.7 per cent, according to Moneyfacts. The rate was 9.4 per cent in January 2001.

Andrew Hagger of personal finance website said: “The risk of defaults is higher in the current economic climate, and with banks making such ultra thin margins, the rates offered a few years ago were not sustainable with any defaults soon wiping out the profit margin on the loan itself.”

Householders To Get £400 For Old Boilers

(Telegraph) – THOUSANDS OF HOUSEHOLDS will be able to apply for vouchers giving them £400 off the price of a new boiler, under a ”scrappage” scheme launched today to cut carbon and help people save money on bills.

Up to 125,000 households with working boilers with the lowest ”G” rating in England can apply for vouchers from the Energy Saving Trust towards ”A” rated boilers or renewable heating systems such as a biomass boiler or heat pump.

The Government said the £50 million scheme will save as much carbon as taking 45,000 cars off the roads and will also cut a household’s energy bill by up to £235 a year.

The average cost of a boiler and its installation is around £2,500, according to the heating industry.

Some energy companies are planning to complement and even match the Government offer with money-off initiatives for upgrading to more efficient boilers – so that more householders can take advantage of the scheme.

The Government said the programme would also help sustain work for the 130,000 installers and 25 boiler manufacturers in the UK during the recession.

Gordon Brown, who is launching the scheme with Energy Secretary Ed Miliband, said: ”Today’s announcement will slash household energy bills and carbon emissions while providing an important boost for the British heating industry.

”The Government’s new scrappage scheme will help to secure 250,000 jobs across the tens of thousands of small and medium businesses involved in boiler manufacture, sales and installation that form a vital component of Britain’s low carbon economy.”

Mr Miliband said: ”The boiler scrappage scheme will save around £200 off heating bills per year for families that are replacing their old boilers, and in total will save the same amount of carbon equivalent to taking around 45,000 cars off the road.

”The scheme will add to the existing package of Government measures to help householders be smarter about the energy they use, leading to permanently reduced fuel bills and cutting emissions.”

A spokesman for British Gas announced that it would match the Government’s pledge of £400.

The company’s managing director, Phil Bentley, said: “We want to help customers take advantage of the new boiler scrappage scheme, so we’re offering to match the Government’s £400 allowance, which means customers can cut a total of £800 from the cost of a new boiler from British Gas.

“As the country’s leading installer of energy-efficient boilers, we know that new boilers help lower fuel bills by as much as £235 a year.”

Bank Charges Case Dropped By Consumer Watchdog

(Guardian) – THE OFFICE FOR FAIR TRADING has abandoned its legal fight against Britain’s banking sector over unauthorised overdraft charges, after losing its landmark test case at the supreme court last month.

The watchdog admitted this morning there was only a “limited” chance a second case would succeed. It insisted, though, it is still committed to reforming the personal current account market.

“The supreme court judgment was not the outcome we had hoped for and was disappointing for many bank customers,” said the OFT chief executive, John Singleton.

“Having now considered in detail all the options available to us in light of the judgment, we have decided not to continue what would be a narrow investigation with limited prospects of success.”

The decision is a blow to more than a million bank customers who had hoped to reclaim charges – up to £38 a time in some cases – levied by their bank when they went overdrawn without permission.

Four weeks ago, the supreme court ruled that overdraft charges were not unfair, under clause 6 of the Unfair Terms for Consumer Credit Regulations. Experts have suggested the OFT should have brought its case under another part of regulations, but the OFT has now concluded this would probably also fail.

It now intends to talk with banks and consumer groups to find ways of improving the market. This could include new legislation, it hinted.

“Despite some recent and planned improvements by banks, particularly around transparency and customer switching, the OFT believes fundamental changes are still required for the market to work in the best interests of bank customers,” the OFT said.

“Banks earn around a third of their personal current account revenues from unarranged overdraft charges that are difficult to understand, not transparent and not subject to effective consumer control.”

Consumers who still hope to win back bank charges have been warned against using the services of claim management firms who offer to handle cases in return for a share of any funds recovered.

Alistair Darling To Target High Earners

Alistair Darling (Telegraph) – HIGH EARNERS HAVE BEEN WARNED by Alistair Darling, the Chancellor, that they will be expected to “bear the greatest burden” of economic recovery in this week’s pre-Budget report.

Mr Darling is considering levying one-off windfall taxes on bank profits and a super-tax on bankers who receive bonuses above a certain level, and indicated that he expected the rich to pay more in tax.

Taxing profits at 10 per cent would bring in around £2 billion this year alone, but while both moves are said to be “on the table,” a final decision ahead of the pre-Budget Report has yet to be taken and the Chancellor has discussed the options with Gordon Brown today.

Mr Darling indicated there would be no back-tracking on the new higher rate of income tax, of 50p on earnings of more than £150,000, to be introduced from next April.

Amid warnings from business groups about the impact of hefty tax rises on the people he needs to drive growth, he is thought to have resisted calls to extend the rate to those earning £100,000 or more.

David Frost, director general of the British Chambers of Commerce said raising taxes on middle and high earners would be “enormously damaging” for Britain at a time when it needs talented people to drive an economic recovery.

“The very people we need in this country to create wealth could be located anywhere and will simply go somewhere else.

“Taxes above 50 per cent would be hugely harmful for the UK. This is the very time that we need as much business in the UK as possible.”

However, with borrowing expected to reach £180 billion, the highest level since the Second World War, Mr Darling warned that the rich would have to expect tax rises, saying: “You would expect the broadest shoulders to bear the greatest burden.”

Any windfall levy on banks’ profits would be designed to apply not just to UK banks such as the Royal Bank of Scotland and Barclays, but also to the British arms of global firms including JP Morgan and Deutsche Bank.

The decision has gone to the wire, however, as officials have been clashing over the legality and administrative complexity of the plans.

Mr Darling is considering two versions of a tax on bonuses, which are predicted to reach £6 billion this year despite the recession. The first would be a levy on payouts above a certain rate, the alternative would be a substantial increases in national insurance charges for banks which pay bonuses.

Mr Darling is said to be tempted to exploit voter anger at bankers awarding themselves large bonuses so soon after being bailed out by the tax payer.

The City has warned that the move would hamper the ability of institutions such as the Royal Bank of Scotland to attract the talent needed to restore balance sheets and ultimately delay banks’ ability to pay off the taxpayer loans and return to the private sector.

George Osborne, the shadow chancellor, said that he was not opposed to a banking windfall tax in principle, but that the Tories would focus on taking steps to stop banks offsetting losses against future tax bills once they began to make profits.

Vince Cable, the Liberal Democrat Treasury spokesman, accused both parties of a “lack of clarity”

The Daily Telegraph also understands that this Wednesday’s pre-Budget report will see the inheritance tax threshold frozen at £325,000, with plans to raise it to £350,000 cancelled.

This would allow Mr Brown to continue his strategy of accusing the Tories of seeking to deliver tax breaks for the wealthy. The Conservatives are committed to raising the threshold at which tax must be paid to £1 million.

However, Mr Osborne, disclosed that the impact of the recession meant that a Tory government would not legislate to raise the threshold for the first “year or two” in office. He said: “This country is virtually bust.”

KPMG have suggested that the Government might seek to levy a new 50 per cent inheritance band on estates worth more than £1 million.

However, Mr Darling refused to respond to predictions that he would use the PBR to “soak the rich”.

Accountants BDO had predicted that Mr Darling would raise the rate at which profits on capital investments are taxed from 18 per cent to 20 per cent. They suggested that there could even be a new Capital Gains Tax rate of 40 per cent on short term gains.

Ernst and Young forecast that he could introduce a new 60 per cent band for those earning more than £500,000 a year, raising an extra £2 billion annually.

Meanwhile, the accountants Grant Thornton suggested that an extra 70,000 people a year could to be dragged up into the 40 per cent tax bracket if Mr Darling froze the personal allowance on which no tax is due, even though average earnings rose 1.2 per cent.

Mr Darling is understood to be keen to give Labour ammunition with which to fight at the next election by painting the PBR as an equality budget.

He told the BBC’s Andrew Marr show: “It wouldn’t be right to be giving further tax breaks to people at the very top.”

Mr Darling said: “We are not going to be held to ransom by people who believe you can pay extraordinarily high bonuses without regard to what’s going on.”

The Chancellor warned of tough times ahead, saying: “On Wednesday I will set out what I think we need to do. That will involve some very difficult choices,” he said.

“It will mean making public spending much tighter.”

Tomorrow, ministers will make clear that high earners in the public as well as the private sector be made to bear the costs of the recession, with as many as one in five senior civil servants to lose their jobs.

In a speech, Mr Brown will promise £12 billion in efficiency savings across Whitehall, including £100 million a year from staff costs.

Mr Darling is likely to announce that some departmental budgets will face cuts of as much as 20 per cent while frontline services such as cancer care and teaching are protected.

As a first step, he disclosed that plans for a multi-billion pound super computer for the National Health Service would be cancelled.

Incentives and stimulus measures will continue, with Mr Darling poised to announce a new scrappage scheme, based on that for old cars, with households being paid £300 to trade in old boilers for new green models.

There will also be more money for jobs, after Yvette Cooper, the Work and Pensions secretary, disclosed that unemployment would continue to rise next year, above the current level of 2.5 million.

FSA To Ban ‘Liar’ Home Loans

(Reuters) – THE FINANCIAL SERVICES AUTHORITY plans to force mortgage lenders to check the income of all borrowers, scrapping so-called ‘liar loans’ blamed for helping to fuel bad debt problems at the heart of the credit crunch.

In a long-awaited review of the mortgage market published today, the FSA said it would impose affordability tests for all mortgages; but stopped short of imposing ratio limits that could have effectively banned loans for 100% or more of property prices.

The review, which reflects a more intrusive style from the FSA, criticised for failing to prevent last year’s financial crisis, also banned products with ‘toxic combinations’ of characteristics and arrears charges when a borrower is already repaying.

It called for the FSA’s scope to cover buy-to-let (landlord mortgages) and all lending secured on a home.

‘The FSA needs to ensure that firms only lend to people who can afford to pay the money back,’ Jon Pain, managing director of supervision for the regulator, said. ‘The reforms that we have announced today will ensure that the mortgage market works better for consumers and that it is sustainable for firms.’

The FSA’s discussion paper will be open for consultation until the end of January, with the next statement, on industry feedback, to be published in March.

Benefit Claimants Will Not Have To Return £1 Billion Over-Paid

(Daily Mail) – BENEFIT CLAIMANTS have today been handed the right to keep one billion pounds a year in wrongly-paid handouts.

The Appeal Court ruled that Whitehall has no right to try to force them to give back benefits which have been wrongly paid because of bureaucratic mistakes.

The decision, in a key test case, affects payments made by the Department of Work and Pensions.

They include many of the benefits that cost the taxpayer the most, including Income Support, Incapacity Benefit, Housing Benefit, Pension Credit and the state pension.

Auditors say errors by clerks and managers inside DWP offices were responsible for £900 million in benefit overpayments last year.

The figure is certain to have gone up this year as the recession has pushed the total of DWP benefit payments up by well over 10% — to almost £150 billion.

Today’s ruling came after a two-year legal battle in which a poverty pressure group challenged attempts by the DWP to claw back money overpaid to claimants.

Under social security law, officials can demand repayment of benefits wrongly paid because people mistakenly misrepresent their circumstances or innocently fail to disclose important information that would reduce their benefit entitlement.

An example would be someone who honestly neglects to disclose that they have begun living with someone and are no longer living alone.

Those who deliberately lie on benefit claim forms to get more money can be prosecuted for fraud.

But the 1992 Social Services Administration Act does not give the DWP the right to demand the return of money wrongly paid because of blunders by its own staff.

Until 2006, the DWP sent out letters to those who had been overpaid through official mistakes, which invited them to discuss how they might pay the money back.

But in 2006 and 2007, the department sent out a new letter to 65,000 overpaid claimants.

It claimed a legal right to take back money paid out due to official mistakes, and threatened to sue in the county courts those claimants who refused to co-operate.

Specimen cases put before the court included overpayments totalling £2,055 in one case and £796 in another.

Appeal Judge Lord Justice Sedley yesterday backed the protests of the Child Poverty Action Group, which said the DWP was unfairly pursuing claimants who had been overpaid through no fault of their own.

He said: ‘The covering letters seek, creditably, not to threaten and not to alarm unduly.’

But he added that they ‘can be devastating to a person already living in or close to penury.’

His decision overturned the ruling of a High Court judge earlier this year who said the Government was entitled to use the courts to ask for its money back.

The Appeal Court judgement said the complex machinery of social security law should be enough to deal with the problem of overpayments and that it was wrong to threaten claimants with the civil courts as well.

Child Poverty Action Group lawyer Graham Tegg said: ‘That amounted to double jeopardy. The DWP was saying, “heads I win, tails you lose.”

‘We brought this case because we know that letters sent to vulnerable claimants threatening court action if they do not repay have caused considerable distress.

‘We are delighted with the ruling that the DWP cannot recover these overpayments through the courts.’

Estimates of payments wrongly made by the DWP were published by the Whitehall spending watchdog, the National Audit Office, in July. It said that DWP benefit spending lost £900 million through fraud, £900 million through mistakes by claimants, and £900 million through errors on the part of officials.

The Appeal Court blow to the Department of Work and Pensions follows the scandal over overpayment of tax credits, which threw Gordon Brown’s flagship new benefits system into disrepute.

Around £6 billion in tax credits have been overpaid since 2003 and there has been a longstanding row over the demands by Revenue and Customs, the department responsible for tax credits, to get its money back.

The Appeal Court case, however, only applies to benefits paid out by the DWP.