Monday, April 7, 2008

Mortgage Panic Spreads Across England

Happy Monday everyone. Good luck to all of the Kansas/Memphis fans tonight.

Well things in the financial markets are deteriorating at lightning speed as this massive worldwide debt bubble forces the credit crunch to deepen. The weight of this bubble is taking a tremendous toll on housing.

Bloomberg reported today that a massive panic has spread throughout England as the banks continue to raise rates on mortgages making housing virtually unaffordable for most of the Brits. From Bloomberg:

``This is a panic,'' said Nigel Welch, 54, director of mortgage broker TS Mackenzie in London's fashionable Islington neighborhood. ``Mortgages are more expensive and harder to get. I've had to turn away some people that I know won't find the loan that they need.''

"The mortgage market has tightened this month as banks scramble to conserve cash and stem a credit binge that fueled the country's decade-long housing boom. The number of home-loan products on offer declined by 21 percent in the past two weeks to 4,499 on April 4, says Moneyfacts Group, a financial Web site. "

My take:

Take a very close look at this crisis because you will be seeing it in the USA very soon. Let me explain, England's version of the Fed never dropped rates as their housing bubble inflated because they were worried about inflation. Notice the recent strength of the Euro/Pound versus our dollar.

They kept their rates at 5% which is actually the responsible thing to do for the long term because inflation can destroy an economy because it sucks your citizens wallet dry. The US Fed decided to slash rates as soon as we saw our bubble inflate which is why gas is now $3.40 a gallon and rising along with everything else we use everyday.

OK, So you have high rates to begin with in England. Compound this with the fact that the banks in Europe have been forced to hoard cash because they bought tens billions of dollars of our subprime "AAA" bad debt they have had to writedown as losses.

On top of this, they have had to cope with a huge housing bubble in England and the rest of Europe along with additional bad loans they made in the USA. The result is you have banks in Europe that are bordering on insolvency(see Northern Rock) and have ZERO desire to lend thus higher mortgage rates.

How high are rates? Take a look at the example from the article:

"`Horrible Shock'
``This has been a horrible shock,'' said Sue Freeman, 43, a health researcher living in North London. She comes off a five- year mortgage rate of 4.65 percent next month and her lender wouldn't offer a new deal below 7 percent. ``I went into panic mode. I thought we'll never be able to afford a mortgage again.''

In closing:

So there you go. Poor Sue went from a 4.65% up tp 7%. Expect the same thing to happen here only in reverse!

Here is how it will play out in the USA. Inflation will start to get out of control (it already has,
been to the grocery store lately?) which will eventually force the Fed to raise rates. Our banks(which are also in shambles) will then be forced to raise rates and the result will be a panic similiar to the UK.

Housing will get destroyed when this happens. Millions of people will be priced out of the market when rates rise to these levels. Prices are already falling in the USA at record levels. Expect this to accelerate when the Fed HAS to raise rates in order to control inflation and protect our dollar.

I advise you to watch the UK and keep an eye on how this all plays out. I expect prices over there to freefall even if they decide to lower rates. The banks need cash right now and cutting rates doesn't matter. Stay tuned.

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