The Return Of Sub-Prime Lending.

HAMISH_MCTAVISH

The return of sub-prime: mortgage firms target 'overlooked' market

Friday 29 October 2010

Three years after huge losses on sub-prime mortgages sparked the global financial meltdown, lenders are entering the British market with promises of home loans for people with a poor credit history.

A new lender, Precise Mortgages, says it has lined up hundreds of millions of pounds in funds to begin offering home loans to buyers excluded by the mainstream banks.

The Wolverhampton-based company will launch the mortgages this year after gaining approval from the Financial Services Authority this week.

It will target individuals turned down by high street banks because of a blot on their credit record.

Two other niche lenders, Kensington Mortgage Company and Aldermore, have also in recent months begun offering sub-prime loans.

In information prepared for "intermediary use only", Kensington says it will accept borrowers who have already had two county court judgments in the last two years and up to two defaults on unsecured loans.

None of the lenders use the phrase "sub-prime", preferring to describe customers as good quality risks with minor blemishes on their credit record.

These customers can be highly profitable for lenders as interest charged on the mortgages is significantly higher than standard rates.

A spokesman for Kensington said it did not like the phrase sub-prime borrowers: "We say 'overlooked by the high street'."

Critics blame irresponsible sub-prime lending during the 2005-2007 period as the catalyst for the financial crash. At the height of the property market in 2007, sub-prime mortgages – frequently granted to people with little proof of income or ability to repay – made up more than 7% of the UK loans market.

In the US, where the sub-prime boom was even bigger, they became known as Ninja loans – no income, no job and no assets.


Many of the loans were packaged into mortgage-backed securities, and when the $6.5tn market collapsed, lending between banks froze. In September 2007 Northern Rock became the first major UK casualty of the wider sub-prime crisis. Most sub-prime lenders in the UK, controlled by the investment banks, shut down during 2008 and 2009 and the products all but disappeared.

Alan Cleary, managing director of Precise Mortgages, said the lessons of the crisis had been learned and that income affordability checks were now much tighter.

New FSA rules have effectively banned lending to individuals who cannot prove their income. Cleary said: "Our customers will be very minor adverse credit. It could be as trivial as having missed one credit card payment six to nine months ago. That alone would stop a lot of people from qualifying for a mortgage at the moment."

Figures today from the Bank of England revealed that net new mortgage lending (not including redemptions and repayments) in September was £112m, down from £1.62bn in August. Economists warn that moribund lending volumes are pushing the property market towards a double dip. Yesterday Nationwide said house prices fell by 0.7% in October, taking the quarter-on-quarter drop to 1.5%, the biggest decline since April 2009.

Precise Mortgages says the reintroduction of lending to those with poorer credit records will help boost the market. "The good news here is that we are providing new funding. Elsewhere in the mortgage market, everything has to be funded by deposits, which is why there are so few mortgages available. We are bringing brand-new cash into the marketplace."

Damon Gibbons, of the Centre for Responsible Credit, said he was concerned about "predatory pricing" of mortgages to those excluded by the high street. "As we went into the recession, the response by lenders has been a flight to quality. What that has done is create a growing number of people whom the mainstream won't serve. In turn, that creates a pool of demand for sub-prime at higher interest rates, and it becomes very profitable for the banks as a whole to see the mortgage market segment in this way."

Gibbons said he wanted a reform of credit scoring systems, but warned that unless there was an improved supply of housing, new lending would inflate house prices and create another bubble.

http://www.guardian.co.uk/money/2010/oct/29/sub-prime-mortgages-return

Despite some lazy journalism around conflating UK sub prime lending with the credit crunch (Graham, try not to get too excited), it's overall a pretty good article with balanced reporting.

Interesting that UK sub prime is now about to return, given todays topics on the board.

Also interesting that some of the situations they describe are clearly sub prime, CCJ's and defaults.

Whilst others are such minor blemishes they'd never have been considered sub-prime before. Such as forgetting to make a card payment 9 months ago.

Of course it won't stop them making a fortune from overcharging the ones that are otherwise low risk borrowers with minor blemishes being rejected by the high street banks because of mortgage rationing due to funding constraints.

It is surprising however that so many bears would be in favour of lending restrictions which force so many people to pay these higher rates.... Doesn't seem very MSE at all.

Running_Horse

I've got nothing against giving a mortgage to someone who has missed a couple of credit card payments several years ago. The only worry is lending high multiples and to those too lazy to save any deposit at all. It would be nice to see lenders responsible for all arrears where they clearly should not have loaned money in the first place.

Generali

Running_Horse wrote: »

It would be nice to see lenders responsible for all arrears where they clearly should not have loaned money in the first place.

Unfortunately the way that the economy works now is that taxpayers are on the hook for bad lending decisions. Sub prime today = higher tax bill tomorrow.

Fortunately, it looks like this isn't sub prime as we knew and loved it. It's more like sub pristine. Actually, that's probably a good market to be in right now.

HAMISH_MCTAVISH

Generali wrote: »

Fortunately, it looks like this isn't sub prime as we knew and loved it. It's more like sub pristine. Actually, that's probably a good market to be in right now.

I'd tend to agree. Most of the lending will be to people that would traditionally be considered a good risk, but cannot now get a mortgage from the high street players.

But this is interesting....

"Kensington says it will accept borrowers who have already had two county court judgments in the last two years and up to two defaults on unsecured loans."

That sounds like genuinely sub prime to me.

Graham_Devon

HAMISH_MCTAVISH wrote: »

http://www.guardian.co.uk/money/2010/oct/29/sub-prime-mortgages-return

Despite some lazy journalism around conflating UK sub prime lending with the credit crunch (Graham, try not to get too excited), it's overall a pretty good article with balanced reporting.

Interesting that UK sub prime is now about to return, given todays topics on the board.

LOL

After all that talk of "it didn't exist in the UK, there were no problems with it in the UK", you go on to say it's returning.

Hence having to tell me not to get too excited....you must have known yourself how this was gonna go

Class

Critics blame irresponsible sub-prime lending during the 2005-2007 period as the catalyst for the financial crash. At the height of the property market in 2007, sub-prime mortgages – frequently granted to people with little proof of income or ability to repay – made up more than 7% of the UK loans market.

Highlighted that bit for you Hamish

Graham_Devon

And may I say "significantly higher interest rates" sounds like a recipe for absolute disaster in todays climate. Especially if they are going to be linked to the base rate.

HAMISH_MCTAVISH

Graham_Devon wrote: »

LOL

After all that talk of "it didn't exist in the UK, there were no problems with it in the UK", you go on to say it's returning.

I never said UK sub prime didn't exist. I said it was a tiny percentage of the market, didn't cause the global financial crisis, and hasn't caused any significant problems in the UK....

And I was right.

Hence having to tell me not to get too excited....you must have known yourself how this was gonna go

Class

Actually I did know exactly how this would go.

You'd misquote me and get overly excited.

Again, I was right.

Graham_Devon

Talking about misquoting. No one has ever said to you that the UK sub prime mortgages CAUSED the global financial crisis. It DID cause significant problems in the UK...Northern Rock. Just because it was nationalised and saved, does not mean it didn't cause problems. We even had to split the bank inot two areas, bad and good!!

All they have ever said to you is that we were part of the problem, and it can't be all blamed on the Americans...when we were doing the same thing.

So what's your take on this, apart from blaming the "bears" for this returning to the UK? (I'm unsure how you can blame specific people?)

Do you think it's a good thing?

DervProf

Graham_Devon wrote: »

All they have ever said to you is that we were part of the problem, and it can't be all blamed on the Americans...when we were doing the same thing.

Albeit to a lesser degree.

I still haven`t heard Hamish`s opinion on what would have happened if the Americans hadn`t played fast and loose with their lending.

I asked earlier, would our HPI have been as high, and if we are innocent, why did NR, B&B get so embroiled in the situation ?

DervProf

These people who blame it on the Americans, it`s like the reciever of stolen goods blaming the thief. It was OK to recieve the stolen goods and profit from them, but when the thief gets arrested, the reciever blames his loss of income on the thief.

Generali

HAMISH_MCTAVISH wrote: »

I'd tend to agree. Most of the lending will be to people that would traditionally be considered a good risk, but cannot now get a mortgage from the high street players.

But this is interesting....

"Kensington says it will accept borrowers who have already had two county court judgments in the last two years and up to two defaults on unsecured loans."

That sounds like genuinely sub prime to me.

It does. However 'considering' and 'lending to' are very different things.