UK Sub-prime could be worse than US

mystic_trev

Aug. 8 (Bloomberg) -- We are now all familiar with the damage that can be done to financial markets by a subprime lending crisis. Global equity markets have taken a battering recently because of concerns about U.S. home mortgages.
So which country is next?
The U.K. has had a property bubble every bit as crazy as the U.S.'s. Valuations were stretched, and lending criteria loosened. And now arrears are starting to rocket, even while the economy remains healthy.
Not only does the U.K. face its own subprime crisis, it could be far worse than in the U.S.

Interesting article.

http://www.bloomberg.com/apps/news?pid=20601039&sid=axWmsMHJDjiQ&refer=columnist_lynn

Melissa177

I'm not convinced by this, for two reasons:

The Americans have been on a credit binge for a lot lot longer than we have over here.

Lenders don't appear to have the same stringent requirements that we have when agreeing to lend hundreds of thousands on a home. My parents live Stateside (I grew up there), and we have no shortage of American friends who aren't even asked about their income and whether they could meet payments when being offered a loan.

Same with car loans - my mother is car shopping at the moment in the States, and reports getting incredulous looks from car dealerships when she tells them she's a cash buyer.

Finally, whilst the MPC have hiked five times in the past year, the Fed have hiked much higher in relation to where they were before (ie, below 2% in 2004-5). The percentage increase has seen people's repayment shoot up a much higher proportion than in the UK.

It's not that I don't think there will be problems with the default rate in the UK, but I don't think the problem will be as widespread as it is in the US.


Incidentally, Northern Rock is top of my hitlist for "mainstream" lenders that might be hit by an increasing default rate (I'm ignoring Kensington and the like).

Guy_Montag

Melissa177 wrote: »

I'm not convinced by this, for two reasons:

The Americans have been on a credit binge for a lot lot longer than we have over here.

Lenders don't appear to have the same stringent requirements that we have when agreeing to lend hundreds of thousands on a home. My parents live Stateside (I grew up there), and we have no shortage of American friends who aren't even asked about their income and whether they could meet payments when being offered a loan.

Same with car loans - my mother is car shopping at the moment in the States, and reports getting incredulous looks from car dealerships when she tells them she's a cash buyer.

Finally, whilst the MPC have hiked five times in the past year, the Fed have hiked much higher in relation to where they were before (ie, below 2% in 2004-5). The percentage increase has seen people's repayment shoot up a much higher proportion than in the UK.

It's not that I don't think there will be problems with the default rate in the UK, but I don't think the problem will be as widespread as it is in the US.


Incidentally, Northern Rock is top of my hitlist for "mainstream" lenders that might be hit by an increasing default rate (I'm ignoring Kensington and the like).

I've been trying to work out who is are the UK sub-prime lenders. Kensington are the only one I can come up with, I believe Picture/Purple/Ocean are all offshoots from mainstream lenders.

Melissa177

There's loads of them, although I suspect that a lot of them are backed by the same banks and packaged into CDOs together.

Google "mortgage" and "bad credit" together, and you get a load:

http://www.google.co.uk/search?hl=en&q=mortgage+bad+credit&btnG=Search&meta=cr%3DcountryUK%7CcountryGB

free4440273

"...the ratio of household debt to personal income is 1.62 in the U.K., compared with 1.42 in the U.S., 1.36 in Japan and 1.09 in Germany."
...this is going to turn quite bloody - and today's inflation report won't help. i'm sticking my neck out here (as i did on the MPC interest rate thread): i think they might just wipe the floor with a .50 increase. sound's mad and unlikely but the more i think about it, the more 'logical' it sounds. they need to do it by october however; november being too close to xmas.

Generali

My guess is that the first people with problems will be the ones that have IO 100% mortgages where the fix is coming to an end. They're going to find that the same deals just aren't available if credit standards are being raised. If I was lending IO right now (ie lending to someone that can only maintain, not repay the mortgage) I'd want a pretty health equity cushion in case I had to repossess.

If lenders agree with me then a lot of people are going to be forced on to the SVR at OMG%. If they couldn't afford to repay the mortgage at 5%, they're not going to manage at 7 or 8% (Nationwide SVR-7.24%, Halifax-7.75%, Northern Rock-7.84%)

Pobby

Like a housing crash,this isn`t going to happen over night.The boe have been steadily raising interest rates,slowly applying the screws so as the imcreases occur so do the house repos and personal loan defaults.

Clearly the house price jamboree has affected peoples judgment.I have heard people say all the usual rubbish including that the government will step in(yea right,just as the tories did in the early 90s---lol).The truth is inflation is on the move upwards,wages are pretty static.I am very sure that the boe won`t hike by .5%,as they should have last year but another quarter is on the cards before the end of the year.

There has been a lot of sub prime lending not just in the housing market and I think the US is showing what will happen.