2008 the year of UK subprime?

hgllgh

KITCHEN1 wrote: »

I also disagree.

The UK housing market has it's own issues ,but they're not that directly similar to the US in terms of sub prime.
You're going to get a lot of opinions on this subject, but there won't be many backed up with hard data, because it's hard to come by.I suspect you will have problems even getting a definition of what exactly is "sub prime".
The UK is overleaveraged and oversupplied in some areas of property investment, inarguable and typical of boom misallocation ,but regulation here has not allowed the extremes of abuse I have had related to me by contacts in the US.

I'm not bullish on property in the UK ,but I'm also not as inclined to look at the US and make an assumption that what we see there will be replicated here. This kind of psychological searching for repetitive patterns is full of investment blind alleys.

There is the issue of what exactly subprime means but if you were to class them as risky loans ... high multiples, 100%, 125%, 40 year terms as well as poor credit histories etc etc my guess is that you would probably find similar levels of risk in lending between the two countries.

I've done a bit of digging around and I believe you are wrong to dismiss the UK subprime sector.


Repo's up 30% year on year...
"The signs of trouble ahead can be seen in the number of homes now being repossessed because
their owners can't keep up the payments. According to the Council of Mortgage Lenders, lenders
foreclosed on 14,000 properties in the first six months of the year, 30 percent more than in
the year-earlier period. That reflected ``the impact of an increasing amount of subprime
lending within the overall market,'' the council said in a statement on the figures."

Arrears are not looking good either ...
"Arrears aren't in great shape. An estimated 125,100 households are behind with their mortgage
payments, about 1 percent of the total, according to the council. Home owners behind with the
payments will have their homes repossessed a few months down the line, unless their finances
improve."

UK debt binge worse than the US ...
"The British are deeper in the red than any other major economy. According to data from the
National Institute of Economic and Social Research in London, 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."

The Financial Services Authourity has critisized the UK sub prime sector...
"The U.K. is now facing a subprime crisis on a similar scale to the U.S. As anyone who has
taken out a mortgage in Britain will know, banks shovel out money without asking many
questions. A review by the U.K.'s Financial Services Authority last month criticized reckless
lending in the subprime sector, which has, it said, ``resulted in the approval of potentially
unaffordable mortgages."

"Clive Briault, managing director of retail markets at the FSA.
High levels of arrears raise questions about the extent to which lenders have taken
affordability into account when writing mortgages.
Subprime mortgages are now more common."

"Back in May, the City watchdog said it was no longer able to ignore an increase in
similarities between the US and UK housing markets, especially given that any slowdown in UK
house prices could leave over stretched borrowers at the mercy of unscrupulous lenders."


BBC reports widespread subprime lending...
"A report by the BBC has uncovered widespread mal-practice in UK sub-prime mortgage lending,
which it is predicted could lead to a mirror image problem of the US sub-prime lending crisis
according to industry insiders and expert mortgage analysts."
Datamonitor figures for 2006 ....
"
Gross advances in subprime lending sums lent to individuals at the least creditworthy end of
the credit spectrum rose 28 percent to 24.6 billion pounds in 2006, according to independent
market analyst Datamonitor.
That figure is growing at a yearly compounded average rate of 4.7 percent to reach 31.5
billion pounds by 2011, it predicted. "
"Maya Imberg, a financial services analyst and author of the Datamonitor report, said a
growing number of borrowers unable to cope with debts will have to turn to the subprime
market, driving it forward"

Uk property values are around 50% more overvalued than the US...
"U.K. homes also are a lot more expensive. The average price of an existing U.S. home was
$257,400 in January, with a new U.S. home typically going for $313,000. According to the
property Web site Rightmove, the average asking price of a British house was 224,802 pounds
($433,912) -- moving to 359,989 pounds ($694,851) in Greater London."

Subprime lenders have gone bust here just as in the US ...
"LONDON, Sept 10 (Reuters) - British subprime specialist Victoria Mortgages became the latest
victim of the credit crisis on Monday, as the lender said it had gone into administration and
was no longer funding new loans after its costs escalated."

hgllgh

hgllgh wrote: »

There is the issue of what exactly subprime means but if you were to class them as risky loans ... high multiples, self cert, 100%, 125%, 40 year terms as well as poor credit histories etc etc my guess is that you would probably find similar levels of risk in lending between the two countries.

And this appears to be the case ...

http://www.moneyweek.com/file/40516/britains-subprime-problem-is-bigger-than-you-think.html

The latest news from over here is that nearly 20% of all new mortgages written last year were either “subprime” or were “made to a homebuyer who offered no proof of income” reports the FT.

The data comes from the Intermediary Mortgages Lenders Association (which represents mortgage brokers who sell such mortgages). The group’s executive director, Peter Williams, acknowledges that “we didn’t really have a mortgage market for the credit-damaged in the 1980s”. That’s not all. Last time there was a house price crash we had far fewer self-employed people with ‘self-cert’ loans (which are no different to the ‘liar loans’ we keep slating the Americans for). And then of course, there were also far fewer buy-to-letters.

Jorgan_2

I can't give any figures, but nearly every repo I have attended in the last year, has been as a result of a sub prime lender or secured loan company closing on the loan.

danm

Will Arrears and Repo's increase - YES. This is almost undoubtedly the case. There are very few arguements against the fact that this will happen.

Will the UK suffer the same arrears/default as the UK - UNLIKELY. Given the different lending practices and regulations, i think this is less likely. Compared to a typical US Sub-Prime borrower, a UK Sub-Prime borrower is a better credit risk and the way the products are structured as well as interest rates will have less payment shock effects.

Will this impact the banks in the same way? - NO. The size of the UK market and the way that these deals are structured when they are sold to the capital market means this is unlikley to the be the case. Only a fraction of the amount of US mortgage bonds are wrapped up in CDO's which is where the big problems were.

alan44

The UK sub-prime market is nothing like the US one though. The problem over there was two-fold: lending money to people who can't afford to pay it back, combined with a fall in house prices.

There were deals over there that had an initial interest rate of 1%, that were lent to people who patently couldn't afford to pay the money back when the fixed rate ended. Because these loans were being parcelled up and sold on to other institutions, the original lenders didn't care. Our sub-prime lending has been nothing like as bad in general.

Ordinarily lenders can get most of their money back from repossesions. For example you would have struggled to buy a property in the UK that hasn't risen in value in the last 3 years, and not many have fallen in that time.

However property proces in the US have fallen in the last 18 months, and these loans were 100% LTV. Prices have fallen even more in these areas than most, as the sort of people who can still get mortgages don't want to live there.

So basically not all sub-prime is the same, and sub-prime lending is not necessarily problematic when done sensibly. For example someone who was poor with money a few years ago when they were at University is not necessarily a bad risk, if they have a well paid job and put a deposit down. As long as you charge the right interest rate to make up for it, it's not a problem.

Equally the fall out over here has not yet been too bad, though that may not continue. For example RBS 'lost' £1.5b due to US sub-prime, but still made record profits of £10.5b. Not nice, but hardly the end of the world, especially if that was the worst of it.

Come summer we'll have a good idea where any bad debts are, and that is the main worry banks have at the moment (according the the BoE's December report), not liquidity. This would tie in with the slow take up of money pumped into the system by central banks last time round.

If there is no major bad news over here, then I would expect lending to start reverting back to normal in the latter part of the year. After all these institutions have to lend money to make money; they just want to lend it to people who can pay it back. If they stop their share price will collapse, and board members start getting the boot.

WTF?_2

alan44 wrote: »

The UK sub-prime market is nothing like the US one though. The problem over there was two-fold: lending money to people who can't afford to pay it back, combined with a fall in house prices.

Yep, good job UK mortgage lenders have sensibly only loaned cash to people who will definitely pay it back and of course, UK house prices can never fall.

Phew! Crisis averted :rolleyes:

KITCHEN1_2

http://uk.biz.yahoo.com/14012008/35/often-house-prices-fall.html

This is quite a decent data driven piece on UK property absent much of the hyperbole the media tend to include.

danm

This data backs up one of my previous ascertions on another thread that over a 10yr period, house prices have not fallen since the indices began.

i.e. If you are looking to buy now and hold for 10yr's, historical numbers would suggest you would experience house price appreciation. IMO if you are buying a 'home' this long term view is more importan than the "20% house price crash" messages that are thrown around.

benb76

one major difference between here and the US is that demand cannot so easily be met by building more houses due to the lack of suitable land.

dolce_vita

Sub-prime explained in simple terms (about 3 mins in)

http://www.youtube.com/watch?v=SJ_qK4g6ntM

Very funny