According to a survey, house prices in England and Wales have continued their decline last month and are now lower than they were a year ago. Prices fell 0.9 percent between May and June, after the steep 2.5 percent drop of the previous month, Nationwide said today. Its index shows prices are now 6.3 percent lower than a year ago, after eight straight months of decline.

The survey’s release follows data showing mortgage approval numbers – regarded as one of the best guides to the direction of prices – dropped in May to little more than a third of last year’s level.

Fionnuala Earley, Nationwide’s chief economist said, “With house purchase transactions so far below their long term trend it seems unlikely that there will be any rapid turnaround in housing market fortunes in the coming months.”

She noted that volatile markets had led to “more frequent mortgage re-pricing”, exacerbating the previous tightening of credit conditions.

Ms Early said – citing a survey by the Council of Mortgage Lenders – that the fall in transaction volumes has been sharpest among existing homeowners moving house. The proportion of first time buyers ha not changed a great deal, and buy-to-let investors account for a bigger share than average of new mortgage approvals.

Nationwide also published quarterly data showing that over the last three month, prices were lower than a year ago in all regions of England and Wales.

With the south no longer clearly outperforming, the gap between the rate of price change in the north and south of England has narrowed. Although London remains the most expensive area, the capital suffered the first year on year a price fall since 1995.

The only part of the UK where prices remain higher than a year ago – although they have fallen quarter on quarter – is Scotland. Nationwide attributes this to pockets of oil wealth around Aberdeen, and the fact that housing had remained more affordable than in most of the country.

Nationwide say the average UK house price was £172,415 in May, compared with £184,000 in June 2007.

Bradford and Bingley shares have dropped dramatically this morning after the UK’s biggest buy-to-let mortgage lender warned the downturn in the housing market will hit profits this year and that it had secured investment from US private equity firm Texas Pacific Group (TPG) to shore up its finances.

This morning the sale of a 23 percent stake to TPG for £179m was announced alongside a restructuring of B&B’s rights issue, which will see the Yorkshire-based banks raise a further £258m from its existing investors.

Shares will be offered to investors at 55p each. B&B shares were initially suspended and were down 20 percent at 70p when trading resumed shortly after 8:10 this morning.

The deal with TPG is an unprecedented intervention by a buyout firm to help bolster a UK banks finances, and will involve a redrawing of B&B’s controversial rights issue.

“The last few weeks have been challenging for Bradford & Bingley, and this is a disappointing trading update reflecting a more difficult market environment,” Rod Kent, B&B’s executive chairman said.

Analysts have said that B&B’s profit warning will heighten fears of an implosion in the buy-to-let mortgage sector as the housing market deteriorates, and raise the spectre of a buy-out by a rival.

The UK bank was forced to take the extreme measure because its existing rights issue, which was offering shares at 82p each, looked to fail. Plans for the rights issue were initially denied by B&B and investors appeared to reluctant to take the offer up given the state of the UK housing market.

B&B said today that profits will be lower for the financial year, confirming investors’ fears, after it slumped to a pre-tax loss of £8m in the first four months of the year. Its arrears jumped from £23m to £36m.

“B&B has a trading problem. It’s a desperate move, but should ultimately instil some confidence in the company,” said one analyst. TPG’s move might be interpreted as a sign that the worst is over, he said.

Adding to the drama of today’s announcement, B&B’s executive chairman Mr Cranshaw is stepping down due to a “serious cardiovascular condition,” with immediate effect. Rod Kent, B&B’s chairman, will serve as executive chairman until Mr Cranshaw is replaced.

Collins Stewart analyst Alex Potter said last week that the worsening conditions at B&B will have had a significant impact on the rights issue.

Mr Potter said that even if UBS and Citigroup were left carrying the Bradford & Bingley rights issue stock, it would be unlikely to tarnish the Royal Bank of Scotland’s £12bn rights issue or the £4bn issue by HBOS, the owner of Halifax and Bank of Scotland.

According to the latest Nationwide house price index, UK house prices fell 2.5 percent in May, which is the largest single monthly decline is the index’s history.

Due to the price drop, of the Bank of England’s monetary policy committee even more complex as it struggles to set an interest rate policy which is consistent both with surging inflation and a deep slowdown in economic activity.

The seventh consecutive price drop in the past 12 months makes this decline the longest single period of housing declines since 1992.

House prices, year on year, are now 4.4 percent their levels of May 2007. This is a the biggest fall since December 1992, when UK house prices were falling at a much steeper annual rate of 6.3 percent, in the midst of a severe housing downturn.

“The pace of house price falls accelerated in May as more weak economic news added to the gathering momentum of negative sentiment about the housing market,” said Fionnuala Earley, chief economist at Nationwide.

Ms Earley said that the average price for a house is £8,000 less than this time last year at around £173,583. However, house prices are still 5 percent higher than two years ago and 10 percent higher than three years ago.

Michael Saunders, an economist at Citi, noted that the drop in the price index was consistent with other data, such as that of surveyors’ and housebuilders’ groups which also show a sharp slowing in housing demand.

”Housing demand is likely to suffer a further blow in coming weeks as fixed rate mortgages rise in response to the recent surge in interest rates,” Mr Saunders said in a note.

With data showing inflation is rising faster than expected, traders have scaled back their expectations that the MPC will cut interest rates further.

Mr Saunders pointed out that a key interest rate used to set prices for two-year fixed rate mortgages had risen by nearly half a percentage point since mid-April, and large lenders are already announcing increased rates on their home mortgages.

He noted that historically, house prices and consumer spending have been highly correlated and show a closer link in the UK than in many other countries.

The drop in house prices was not entirely unexpected as Nationwide noted. The Bank of England, in March, reported an 11 percent drop in approvals for new home purchases to 64,000, which is the lowest level of demand since the records began in 1993.

In the first three months of this year more than a fifth of homebuyers in the UK, who have a chequered credit history, have fallen behind on their mortgage payments and even those with top-quality ratings have seen a statistically significant rise in delinquencies.

New research from Standard & Poor’s is based on the behaviour of homebuyers, whose loans have been packed in to mortgage-backed-securities, accounting for 80 percent of the £43bn sub-prime mortgage market.

Total delinquencies – which are defined as arrears of more than 30 days – made up 21.73 percent at the end of march while those seriously delinquent by 90 days or more, including those already in foreclosure, edged in to double digits at 10.60 percent.

Unless lenders agree to modify loan terms, the figures show that more than £7bn worth of loans are at risk of defaulting. S&P believes that the loans backing the securities it rates are a representative sample of the market as a whole. The rise in sub-prime arrears threatens further problems not only for the economy but also for those financial institutions that bought securities backed by the loans.

Potentially more worrying is the small but notable increase in delinquency rates among prime mortgage-holders.

S&P, in the report on the performance of securities in this vastly larger market, calculated mortgage delinquency rates for the first quarter of 2008 were 2.41 percent while payments 90 days or more overdue were 0.79 percent. S&P said this showed a “sharp” rise from the previous quarter when the figures were 2.11 percent and 0.62 percent respectively.

Sean Hannigan, a director and credit analyst at S&P stressed that the numbers remained very small, “We have seen numbers like this two years ago.” However, he added: “The difference today is that borrowers are not being helped by rising house prices as they have been in recent years,” he said. “In previous years, homebuyers in difficulty could find another lender to refinance the mortgage. It could mean that now more homes wind up in repossession.”

The fact that a rise is occurring while employment is strong and interest rates low suggests that it may not only be macroeconomic factors making it hard for homeowners to pay their debts.

Of all sub-prime mortgages, roughly 80 percent have been securitised, as have about 20 percent of all prime mortgages. Data from the Council of Mortgage Lenders is more comprehensive but will not be produced until the summer.

Because S&P provides credit ratings on the debt, it must closely watch the underlying loans where payments from homeowners provide the interest and principal on the bonds.

The UK’s largest building society, Nationwide, on Thursday said that it expected UK housing prices to fall further this year, though the percentage decline would “remain within single digits”.

Nationwide’s chief executive, Graham Beale, made the comments as he announced strong financial results for the mutually owned company.

In response to the global credit crunch, Nationwide cut back its mortgage lending and expanded its share of the consumer savings market. The company showed underlying pre-tax profits for the year to April 4 had risen by 17 percent to £781 million.

Net residential lending fell by 40 per cent to £6.7bn, and lending to the commercial property sector was down 29 per cent to £2.4bn. The company said its total net lending of £8.9bn was fully funded by net retail savings receipts of £9.1bn. This compared with 2007 lending of £14.6bn and savings receipts of £3.3bn.

“We experienced strong inflows of savings as customers sought a safe haven for their money following the uncertainty of the credit crunch,” said Mr Beale.

The building society’s cautious approach was illustrated by the fact it had a 19 percent share of the UK savings market, compared to just 7 percent of the residential lending market. In the previous year the company had 11 percent of the mortgage market.

Mr Beale said he would be comfortable if Nationwide retained a 7 percent share of UK mortgages this year.

In the first annual decline for 12 years, Nationwide announced, last month, a 1.1 percent fall in UK house prices. “We think that trend will continue throughout the year, but remaining within single digits,” Mr Beale said

Although builders have reported a further deterioration in th UK housing market, Mr Beale is optimistic, “If anything I think market conditions have improved marginally over the past month,” he said. “We may have seen the first green shoots of recovery.”

Finance Director, Mark Rennison, when asked about the commercial property market, said the commercial sector seems to have been more affected by the credit crunch that residential property.

“We have seen some significant falls in capital values,” Mr Rennison said, “and clearly there is the potential for further falls in value and further pain in the commercial sector.”

MPs were warned yesterday that Northern Rock could take even longer than planned to repay its £24.1bn debt to the government if the UK is hit by a recession or a housing slump.

The Newcastle bank, which was nationalised in February, is intending to repay its entire loan from the Bank of England by 2010 and to relinquish its government guarantees by 2011.

Northern Rock’s finance director, Ann Godbehere, signaled that the bank’s business plan could be thrown off track if the UK suffered an economic recession or a 1992-style housing crash.

Speaking to MPs at the Treasury select committee she said, “There could be a six-month delay in that scenario”.

The banks executive chairman Rob Sandler told the committee that Northern Rock’s business plan was “not without risk . . . it is a challenging plan in these respects”, before adding that the plan could come under pressure if house prices fell by 5 percent or more.

He went on to say, much would depend on the UK economic outlook, “If we suffer a downturn and this leads to higher levels of unemployment than at present . . . at that point this would place consider-able strain on the ability of the company to deliver the plan.”

Adding: “We have stress-tested the plan against a number of scenarios, including a decline in the housing market comparable to that of the 1990s, and the plan is robust [in] that scenario.”

The bank will review its current business plan in during the third quarter of this year.

MPs asked Mr Sandler whether he believed Northern Rock’s brand was broken to which he replied: “I don’t believe so . . . the results of the exercises [carried out] indicated that the brand whilst damaged is not damaged irreparably.”

He explained to MPs that Northern Rock was trying to shrink its mortgage book by almost half by encouraging customers to re-mortgage elsewhere when their loans end. The business plan was based on 60 percent of customers re-mortgaging away from the bank, but he acknowledged that fewer mortgage lenders were actively seeing new business in the current market, so the actual level of redemptions could be less.

“It becomes more challenging if there are more lenders out there who are not prepared to offer products to borrowers,” he said.

But Mr Sandler acknowledged there was a risk that Northern Rock would be left with riskier customers unable to re-mortgage elsewhere.

He told MPs he planned to keep sponsorships, such as Newcastle United and Newcastle Falcons.

Bradford and Binglay is the latest British bank to bolster its balance sheet as it launched a £300m rights issue.

Hit by the turmoil in the capital markets and concerns about declining UK house prices, the mortgage lender is proposing to offer shareholders 16 new shares for every 25 shares they own, at a price of 82p each.

It said the issue - priced at a 36 per cent discount to the theoretical ex-rights price and a 48 per cent discount to the Bradford and Binglay’s closing price on Tuesday of 158¾p – would “strengthen the group’s capital position and mitigate the impact of the previously announced reductions in the value of certain of the group’s treasury investments.”

The move comes as the majority of the UK’s banks are under pressure to strengthen their balance sheets, which have been exposed as fragile after the lenders suffered losses on securities back by US mortgages. HBOS has announced plans to raise a £4bn rights issue while Royal Bank of Scotland is looking to raise £12bn.

The bank’s capital ratios are expected to come under scrutiny when the Barclay’s issues a trading update to investors on Thursday.

The proceeds of Bradford and Binglay’s rights issue will further boost its capital base. This should ease concerns about the effect on the bank’s portfolio of treasury assets. The rights issue is fully underwritten by Citigroup and UBS.

With pressure on the banks from financial regulators to boost the amount of capital they hold is likely to have caused the decision to be made. At the end of December, the lender had a tier one capital ratio – the key measure of balance sheet strength – of 8.6 percent, similar to RBS’s increased target.

B&B said that the rights issue would have given it a pro forma Tier One ratio of 10.1 per cent as at December 31, and the board revised its target ratio range to between 8 per cent and 10 per cent.

Lending margins on new mortgages have widened significantly in recent months as smaller specialized lenders have been forced out of the market. The additional capital will allow B&B to continue selective mortgage lending in the buy-to-let market.

In a statement B&B said: “Demand for buy-to-let mortgages remains high with continuing tenant demand and rising rents. The supply of mortgages to meet this demand is constrained by the lack of funding generally and the withdrawal of several competitors from the mortgage market.

“In raising this additional capital, the directors are confident that the group will be better placed to take advantage of these market conditions by writing selective good quality business at attractive margins.”

The government has pledged to help homeowners who are struggling with their mortgage payments. The Council of Mortgage Lenders says there are 11.8 million outstanding mortgages in the UK.

The help the government will provide comes by way of free legal advice for those at risk of repossession, along with specialist training for debt advice agencies.

The pledge came after key figures from the mortgage industry met Chancellor Alistair Darling and Housing minister Caroline Flint at Downing Street.

Figures published later are set to show more people facing the first stage of the repossession process, but experts say the current situation is a long way off from the problems seen in the early 1990s.

The limited package of measures are aimed at the million-plus borrowers whose fixed-rate deals come to an end this year.

These borrowers are more likely to face higher repayments and have less availability when it comes to mortgage deals as a result of the credit squeeze.

The new debt advice service would be set up through the National Housing Service in order to limit the impact. Specialist training will be available for Citizen’s Advice Service and local authority staff, and lenders will be encourage to give advice to borrowers in difficulty.

Householders in England will also gain free legal representation at all county courts. Ms Flint said, “For the minority of owners who may need support and advice now, we want to ensure it is there for them in the right place and at the right time.”

“It is important to recognize we are dealing with an entirely different situation in the market from what was experienced in the early 1990s,

The fundamentals of the housing market remain strong with high employment, low interest rates, and long term demand for homes from first time buyers.” She added.

Later today, the Ministry of Justice will publish figures on the number of possession claims – the first stage of the repossession process – for the first three months of the year. The information is expected to show that the credit crunch on household finances has caused a rise in claims.

The number of actual repossessions, across the UK and by private lenders only, is shown in figures from the Council of Mortgage lenders (CML) which are published twice a year. The Data for the fist half of this year will be published in August. The CML predicts there will be around 45,000 repossessions this year, an increase of 27,100 from last year.

It seems that the £50 billion bailout of the UK money markets will not be enough on its own to see the economy through the worst. In an unprecedented attack on corporate governance in the UK, the Governor of the Bank of England Mervyn King has warned the banks that they will need to play their part to ensure that the UK economy does not take yet another turn for the worse. So what is happening?

While there was a flurry of relief that the government had pulled off something of a coup with the injection of £50 billion into the markets, this case is slowly unraveling. We are still seeing mortgage lending slumping month on month, house prices have fallen over the last 12 months for the first time for many years and many mortgage lenders are placing ceilings on the maximum mortgages which they will authorise. The situation is not getting any better in the short term!

It would be unfair to suggest that the government thought the affect would be immediate but the much expected flurry of relief has yet to materialise in the market place. Banks are still running to shareholders for billions of pounds to shore up their balance sheets and many of the smaller mortgage lenders are going to the wall. As many people suggested at the time of the £50 billion cash injection, this is one storm which we will have to ride out and one which will get much worse before it gets better. So what about that tax payers cash?

The £50 billion of tax payers money which was introduced to the markets is still very safe with the banks being asked to provide collateral much higher than the amount of money they are looking to raise. There is also the further safe guard that the banks have committed to covering any potential loses on the government’s asset swap. Even if one of the smaller player or a larger player was to go under, the industry itself would be forced to foot the bill just to ensure public confidence remained high.

There has been little news of late with regards to unemployment figures but these are set to rocket over the coming months. There is often a time lag between the economy falling and jobs being lost, although it will not be long before the bad news starts to flow. We are hearing news over the last few days that some of the larger budget clothing Groups in the UK are under severe financial strain with MK One recently put up for sale.

This is very much just the tip of the iceberg and there will be substantially more bad news before we start to improve. The Bank of England may well be forced to reconsider their current stance on interest rates and inflation and look to cut rates in line with their US counterparts. When you know that £50 billion is not going to bail out your economy you know that you are very much in trouble!

The news of an impending summit between the government and the Council of UK Mortgage Lenders is rumoured to be taking place this week, but what will they decide? Will it make a difference to the person in the street?

At the same time as Chancellor Alistair Darling was dishing out words of wisdom to the mortgage industry which he has very much helped to destroy of late, it was announced that State owned Northern Rock were not even following the governments lead. Northern Rock have yet to decide whether their variable mortgage interest rate will be changed after last weeks base rate reduction, in direct to contrast to Darling’s call. So is this a case of do as I say, not as I do?

While the government will argue that this truly reflects the independent nature of the Northern Rock, which is supposed to be run at arms length from the authorities, how can they then criticise the rest of the industry?

The mortgage industry in the UK is literally on its knees with increased funding costs, a falling housing market and a government which seem keen to squeeze them as hard as they can in order to curry favour with the public. It is difficult to argue with some of the points which the government have made, but does this latest outburst not deflect the attention from the Treasury at a time when public spending is under pressure, government debt is rising and the economy is stalling?

It will be interesting to see if the minutes of the summit are released, showing the arguments from both sides, because from an outsider’s point of view it would be interesting to see what was said and any changes agreed for the future. However, is it not ironic that all talk of a one off banking sector tax charge (suggested when they were all doing well) has now been replaced by an atmosphere of “let us work together”.

The bottom line is that while the mortgage companies of the UK could no doubt reduce their rates a little further, there is still massive pressure on funding. Many have been critical of the Bank of England who have injected just a fraction of the liquidity which their US and European counterparts have, despite the obvious deterioration in the financial sector. But is this the fault of the Bank of England, the consumer or even the government?

Let is not forget that this is a government who have bragged about the increasingly bright economic future of the UK for some time, the fact that the boom and bust scenario had gone for good and kept wage inflation in the public sector to a minimal. Now the economy is failing quickly, the bust scenario is returning and we are seeing more and more strike action in the public sector, and all in just a couple of years.

Will Gordon Brown get the chance to breathe new life into the economy, will the mortgage lenders play ball or has the Prime Minister lost his iron tight grip on the UK economy?