UK Mortgages Direct - 0870 4130 345

HBOS, the UK’s largest mortgage lender, yesterday announced that  it expected prices to drop by around  9% this year and also thought that housing purchases would be down 45 per cent this year.

The bank yesterday published the prospectus for its £4bn ($7.9bn) rights issue, said trading was “satisfactory” although mortgage arrears were rising - particularly in its specialist mortgage home loans books.

HBOS shares fell by almost 6% yesterday to 296¾p - close to its 275p rights issue price - amid concerns about arrears and that HBOS might have to write down further assets in its Treasury portfolio, particularly on its exposure to US monoline insurers.

HBOS yesterday wrote down the value of its equity stakes in housebuilders by 50% - or £100m because of the deterioration in the sector in recent weeks.

Robert Law, banks analyst at Lehman, said it “shows worsening trends in mortgage arrears, quality of the treasury portfolio and the first signs of deteriorating cor-por-ate credit quality in the UK. This is a negative read across the UK bank sector.”

HBOS, which is amongst the darkest forecasters on house prices, had predicted in February that prices would be flat in 2008. It revised this prediction to be “mid single-digit” falls in April.

HBOS mortgage arrears jumped to 1.43 per cent of its loan book in May 2008 compared with 1.3 per cent last December 2007.

Andy Hornby, chief executive, stressed this was in line with the bank’s expectations and added that mortgage arrears were actually below the levels seen in June 2006.

“We are coming from an incredibly low base on arrears and the trend is what we forecast,” he said.

He added that HBOS was benefiting from better pricing as it passed on the cost of more expensive mortgage loans to its borrowers. This means its net interest margin - a key measure of profitability - stabilising or even rising in 2009 as it repriced a third of its mortgage book this year.

“There has been so much worry about Bradford & Bingley and we have put in a resilient performance, and this will give people confidence,” Mr Hornby said.

“We will be delivering margin stability - the core underpin of bank profitability in tougher markets.”

Mike Ellis, finance director, told analysts: “We did expect an increase in impairments from what was a very low base. What we said today is that arrears are trading in line with expectations.”