Home Mortgage Loans: It is 2008 Again, But on Steroids
As expected, one year of interest rate increases, combined with a self-induced energy price shock and the disruption of supply-chains, is producing mass insolvencies. The first sector to be hit is the home loan market, as homeowners must pay the mortgage rate every month – different from companies, where losses surface every semester.
On the other hand, bank losses on mortgage loans can unleash the same chain-collapse in the financial system as the 2008 subprime crisis, causing trillions of derivative bets based on those securities to unravel. The solution, as we often repeated, is not to go back to zero interest rates, but to remove the derivatives cancer with a bank separation reform.
As for the figures for Italy and the United Kingdom, they show that the delinquency rate on mortgage loans is already at an alarming level. For Italy, delinquencies on bank loans already amount to €15 billion, according to the Italian trade union of bank employees. Of that 15 bn, 6.8 bn are home mortgage loans, of which 2.7 are classified as bad loans, 3.4 as probable bad loans and 621 mio. as past due payments.
The increase in the cost of money — from zero to 4% in 11 months — has particularly hit mortgage loans with adjustable rates, a category with a total value of €140 billion. Due to the way such loans are issued, the interest rate hike has increased monthly rates by up to 50%. This is making increasingly difficult for households, caught in the pinch between inflation which has reduced savings and higher mortgage rate, to pay the latter.
In Britain, where the central bank has increased rates from zero to 5.5% in one year, it is estimated that nearly 30% of households (roughly 7.8 million) will be insolvent by the end of the year. According to the National Institute of Economic and Social Research, 1.2 million households will run out of savings at year’s end. The largest impact is expected in Wales and the northeast of England.
Delinquencies could be avoided by recovering households’ purchasing power. In the 1970s, after the first oil shock that quadrupled prices and produced high inflation in OECD countries, governments withstood bankers’ opposition and introduced protective measures for household incomes, such as cost of living escalators. But governments today, on the contrary, are under the thumb of the financial oligarchy, which dictates wage austerity in order to “fight inflation”.
The irony is that the obsession with austerity is jeopardizing the West’s drive for a war economy, as can be seen in the case of the Scottish factory that produces the “storm shadows” missiles that are slated for delivery to Ukraine. Workers at the Defense Ministry factory went on strike due to low wages. Indeed, with a wage of 10.40 pounds an hour, they earn less than a checkout girl at a LIDL supermarket. Defense sources told the Daily Mirror that if the strike continues, it could impact the supply of the missiles. The same factory supplies weapons systems to Britain’s nuclear deterrent submarines based at Faslane.