RBS stance will help no one
Before Royal Bank of Scotland gives all its customers a six-month mortgage holiday it should remember that 42 per cent of its shares are still in private hands.
No sooner has the government taken majority control of RBS than the first evidence of state interference is evident in the announcement that it will allow mortgage borrowers to run up at least six months’ of arrears before repossession proceedings are started.
Given the time it takes courts to act, that could mean arrears of at least nine months before the bank gets its hands on its collateral.
Simply adding the missed interest to the principal over that period would increase a loan by 5 per cent – which with house values falling by 15 per cent a year would plunge many of the defaulting borrowers into negative equity.
Apart from appeasing the bank’s political masters it is hard to see who gains from allowing a problem to run so long. The idealistic situation is that the borrowers sort out their finances and unemployed mortgagors find new jobs but in practice, people in trouble now are likely to be in greater trouble in future. The policy risks turning a small problem into a large one - not only for the borrower but for the bank.
And in practice, some borrowers will regard this as an invitation not to pay their mortgages for six months.
What does RBS expect to happen after a customer has defaulted for six or nine months? Will borrowers have to make double payments for the following months until the arrears are wiped out? Or simply pay extra for the whole of the rest of the mortgage – and an extended loan period?
Surely RBS, if not the government, has worked out the effect of compounding interest? The suspicion is that the £20bn of state funds just injected into the bank is to be dissipated by bad decisions on bad debts.
RBS has already pledged to hold overdraft terms for companies in another piece of social engineering that may not pass financial prudency tests. Expect to see other banks forced to follow RBS, not least because of the threat of replacing voluntary codes with statutory requirements to make bad debts worse.
But having become the biggest investor in the banking sector, the government is creating future problems for the sector.
December 2nd, 2008 at 11:51 pm
[...] Richard Northedge expressed concern regarding the initiative on his Director of Finance blog The Edge yesterday: Given the time it takes courts to act, that could mean arrears of at least nine months [...]