Insolvency figures up slightly in first quarter of 2008

The number of people being declared insolvent has risen slightly in the first quater of 2008. It is the first time the figures have risen in a year. Despite the rise, it is worth noting that the numbers in this report are still over 13% lower than those of the first quarter in 2007.

Despite the contrast to last year, many experts believe the numbers will escalate as we contiune to see the effects of the credit crunch. Speaking of the figures, Capital Economics said they are likely to be the tip of the iceberg.

15,651 people were declared bankrupt in England and Wales in the same period, a 6.8% drop from the first quarter of 2007.

Sources: The Guardian, The Press Association, BBC

Mortgage charges are still rising

The credit crunch has led some big mortgage lenders to announce another round of price rises for new customers.

Cheltenham & Gloucester has put up its fixed rate deals by up to 0.6%, and raised its tracker rates by up to 0.4%.

And Abbey, the UK’s third biggest lender, is levying higher initial fees and demanding larger deposits for some of its key deals.

Lenders are continuing to ration their funds for new customers as a result of the credit squeeze.

Most banks and building societies, however, have cut their standard variable rates in line with recent interest rate cuts by the Bank of England.

Tracker rates

Abbey has reduced the interest rate on its two-year tracker deal from 6.37% to 6.12% but is now asking for a minimum 25% deposit instead of the usual 10%.

Some of its two-year fixed mortgages are now also priced at slightly lower interest rates, but now require either higher set-up fees of £999, and in some cases 30% deposits instead of 20%.

Britannia building society has raised all of its interest rates by up to 0.75% for new customers.

The increase across the whole range of its mortgages means that the building society’s cheapest two-year fixed rate - one of the most popular types of deal among new borrowers - is now priced at a minimum of 7.29%.

The crisis in the mortgage market, with lenders being deprived of funds by the credit crunch, has seen lenders change their deals almost weekly.

Since the start of the year Abbey has revamped its mortgage range 11 times, Britannia eight times, and Cheltenham & Gloucester has done so on 15 occasions.

In most cases this has meant putting up the cost of borrowing by changing interest rates, raising the minimum deposit, restricting income multiples or charging higher set-up fees.

The existing mortgage customers of all lenders who are benefiting most from cheaper loans are those whose deals tied directly to the Bank of England’s base rate.

It has cut the cost of borrowing three times since December.

According to the financial information service Moneyfacts: “35% of existing borrowers are on variable tracker rate mortgages, they will have seen rates drop by 0.50% in the last three months.”

The UK’s biggest banks have lost a test case about overdraft charges.

A judge has decided that the Office of Fair Trading (OFT) can rule on the fairness of the charges, which many customers have been trying to reclaim.

Mr Justice Andrew Smith said his judgement did not necessarily mean the charges were unfair.

But the decision opens the door for the OFT to demand that banks cut their charges, unless any subsequent legal appeals are successful.

Thousands of cases currently on hold in the county courts will be frozen until 22 May, by which time the banks must decide whether they are going to appeal against the ruling.

Any additional High Court hearings after that date may further delay those claims.

‘Victory’

Since the beginning of 2006, hundreds of thousands of customers have reclaimed hundreds of millions of pounds from their banks, arguing the charges were too high and unfair.

The banks have consistently argued that their charges were fair and reasonable.

Campaigners have welcomed the judge’s ruling as a victory for consumers.

“The banks should do the right thing now and concede defeat, agree with the OFT what constitutes a fair unauthorised overdraft fee and refund their customers as soon as possible,” said Doug Taylor, personal finance campaigns manager at Which?.

But Angela Knight, of the British Bankers’ Association, said: “We need to take what the judge has said very carefully and not jump to conclusions. This is the start of a process.”

The judge decided against the OFT on two points. He said most of the banks’ terms and conditions were plain and intelligible.

And he added that the charges could not be challenged under common law.

Test case

This judgement means the OFT should be able to decide what a fair charge would be for unauthorised overdrafts.

The OFT described the ruling as an “important early milestone” for its investigation into an area of “high consumer interest”.

“We are continuing our investigation into the fairness of these terms and will consider our position after reviewing the detail of this judgement,” added the OFT statement.

Both the banks and the courts have been deluged with claims since the beginning of 2006, which they were finding very difficult to deal with.

But since both sides agreed to stage the test case, tens of thousands of claims have been put on hold in either the county courts or with the Financial Ombudsman Service (FOS).

The BBC has estimated that last year the banks refunded about £784m to nearly 378,000 customers.

‘Snowballing situation’

Paul Tilley, a law student from Southampton, was one of those customers.

He says he won back £4,000 including interest after his bank imposed charges for exceeding his overdraft limit.

He has an outstanding claim with another bank and hopes the test case will force banks to change their behaviour.

“Looking at my statements from the time, they were taking up to £180 a month off me in charges, it then left me short for paying my bills.”

“As a result my payments bounced, I then went over my overdraft again.”

“It was a snowballing situation.”

Further cases

The OFT first agreed last July, with seven banks and the Nationwide building society, to stage the test case to decide if it had the power under consumer contract regulations to regulate overdraft charges.

The issue of the OFT’s jurisdiction was then thrashed out during 14 days of complicated High Court hearings in January and February.

At stake is not only the ability of aggrieved customers to reclaim their charges but also the ability of the banks to generate an estimated £3.5bn a year in income from levying them.

If the banks eventually suffer a complete defeat on the issue, then it has been widely predicted that they will try to recoup their losses by abandoning the long standing policy of so-called “free banking” for customers in credit.

Instead, monthly or annual charges could be introduced as standard for running an ordinary current account.

Lenders to discuss mortgage woes

Chancellor Alistair Darling and Housing Minister Caroline Flint are to meet mortgage lenders later to urge them to do more to help struggling borrowers.

Mr Darling will ask the industry to find ways to prevent those in trouble from having their homes repossessed.

It follows his backing of a £50bn Bank of England plan to allow banks to swap mortgage debts for government bonds to help them during the credit crunch.

The global squeeze has made mortgages harder to find and more expensive.

The rate at which banks lend to each other has been rising, which has seen banks toughening up their lending terms even though official UK interest rates are falling.

There is particular concern about homeowners coming to the end of cheap fixed-rate deals.

Many of them will face much higher monthly bills at a time when food and fuel costs are already stretching household incomes.

Figures from the Council of Mortgage Lenders last month showed the number of people whose homes were repossessed last year in the UK rose by 21% - the highest for eight years.

Swap scheme

But after the announcement of the multi-billion-pound scheme to help banks with their liquidity problems on Monday, it is thought the chancellor may now feel it is time for lenders to pass that assistance on to customers.

In a statement to MPs, Mr Darling said the Bank’s intervention was necessary because money markets were not “functioning properly” and were beset by a “lack of confidence” despite billions of pounds in liquidity being pumped into the system.

The measures, he said, would help alleviate the “increasing cost and declining availability of lending by banks and building societies”.

Under the plan, banks will be allowed to swap mortgage debts for government securities.

The swap scheme, starting on Monday, will be for a period of one year and may be renewed for a total of three years.

It will only apply to mortgage debts on banks’ books at the end of 2007 and the swaps cannot be used to finance new lending.

‘Improved liquidity’

Michael Coogan, the director general of the Council of Mortgage Lenders, which will be attending the meeting with the chancellor on Tuesday, welcomed the Bank of England’s move and said it would help with two things.

“Firstly, improve liquidity in the market, but that may mean more than £50bn over time.

“Secondly, and importantly, restoring confidence in financial markets, which I hope will bring down the cost of the London Interbank Rate, which affects most consumers,” he told BBC Radio 4’s The World Tonight.

British banks have become increasingly unwilling to make loans, even to each other, as a result of the credit crisis, which was triggered by massive losses for banks involved in the US sub-prime mortgage market.

And many investors, concerned at what happened to sub-prime mortgages in the US, no longer want UK mortgage-based assets.

The disappearance of this market has deprived banks of tens of billions of pounds of finance for mortgage lending.