As Foreclosures Mount, Britain Acts To Change Mortgage System

LONDON, Aug. 22 — Susan Whittaker was desperate. Four years ago, she purchased her first apartment in the town of Rochester, less than two hours east of London. But then interest rates started to rise; and the income from the small shop she ran with her partner no longer covered their adjustable-rate mortgage.

Facing foreclosure, and determined to avoid moving in with her mother, Ms. Whittaker found a way out in an increasingly popular arrangement here known as a sale and rent back.

A private company bought her home, allowing her to avoid foreclosure; then the company rented the house back to Ms. Whittaker and her partner and they did not even have to move.

The catch? The company paid the couple less than the value of their apartment.

Such deals are uncommon in the United States, and mortgage brokers say they discourage them because of the possibility of unscrupulous and dishonest lenders exploiting distressed homeowners.

But desperate times call for desperate measures; and while Americans fear an epidemic of foreclosures, brought on by the subprime mortgage meltdown, Britain is already suffering one.

Foreclosures here are at an eight-year high; lenders have repossessed a record 14,000 properties in 2007, 30 percent more than at the same time last year, according to the Council of Mortgage Lenders. An additional 125,100 households are behind in their mortgage payments.

And personal bankruptcies are at an all-time record, spurred largely by a crushing increase in mortgage debt. The situation has grown so dire — as has the threat of desperate homeowners being exploited — that the newly installed government of Prime Minister Gordon Brown is attempting to change the fundamentals of the mortgage system.

Whether they can is an open question, especially given Britons addiction to home ownership, adjustable-rate mortgages and personal debt. British consumers are the most indebted citizens of any Group of Seven nation; and television shows devoted to real estate and debt advice are among the most popular programs in the country.

We live in a society where we encourage people to take on debt and there is lots of pressure to get your foot on the housing ladder, which has proven quite a fruitful investment for some, said Frances Walker of the Consumer Credit Counseling Service, a debt adviser, in London.

Currently, only 5 percent of British home buyers take out fixed-rate mortgages. The norm here is a mortgage with a fixed rate for the first two years, and then a floating rate for the duration of the mortgage.

But the rate on adjustable mortgages have skyrocketed as the Bank of England ratcheted up interest rates — five times over the last 12 months to 5.75 percent, their highest level since 2001. Add the rising costs of necessities, like food and utilities, and British homeowners are increasingly squeezed. Real estate experts here say that is why more and more of homeowners are turning to sale and rent back. The mushrooming of the unregulated market has worried regulators and lawmakers concerned that homeowners are giving up their houses for as little as 75 percent of market value, with no guarantee they will be allowed to stay in their former property after six months, the minimum lease period here.

Lawmakers are now trying to figure out how to encourage more homeowners to take out fixed-rate loans, but that will not help those already facing foreclosure, or prevent the threat of predatory lending.If there is a silver lining in Britain, it is that, unlike in the United States, home prices are still rising, for now, after more than tripling since 1997. Recent interest rate increases have yet to reverse the trend. In fact, the National Housing Federation recently predicted prices would rise an additional 40 percent in the next five years, taking the average price of a home, which already costs about 11 times the average British salary, to 302,400 pounds, or $618,000.

As long as home prices rise, distressed property owners can still sell their home and get enough money to repay their mortgage debt — in theory. In reality, selling a property here can take several months, and by the time many owners are threatened with foreclosure, they often do not have that kind of time.

Higher prices may push some prospective buyers out of the market, but others will simply take out larger mortgages. Owning a home is so entrenched in the British psyche that most consumers would rather take on additional debt than rent, even if they cant afford it, say real estate experts.

Some debt advisers have warned that higher borrowing needs could result in an increase in lax lending practices and plunge more people into personal bankruptcy, which in turn could hurt consumer spending and slow economic growth.

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