Monday, Aug 20, 2007
Told you...!
BBC News: UK sub-prime market tightens up
Article about the UK's sub-prime lenders running scared. Officially 10% of the UK market is 'sub-prime', although I believe the proportion of mortgages affected will be much greater.
Posted by uncle tom @ 04:08 PM (1083 views) Add Comment
12 Comments
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1. japanese uncle said...
Being a sub-prime borrower or not is highly relative, depending on the house price and IR, both of which are changing from time to time. A factory worker with 25K may well not be categorized as sub-prime. when he buys a three-bed semi-detached in a reasonable residential at the cost of 100K., while the same person, when buying the same house at 300K, he is extremely unlikely to escape falling into the sub-prime category eventually. In that sense significant share of the house buyers (particularly the FTBs) at the moment are presumed to be running the risk of going sub-prime sooner or later.
2. wage slave said...
So-called sub-prime mortgages currently account for about 10% of all home loans in the UK.
Hold on - a few months ago we there was no 'sub-prime' in the UK. Is 10% the thin end of the wedge ?
3. denzil said...
It's an interesting point JU.
Sub-prime for want of a better word is high-risk. Lenders traditionally allowed borrowers 3.5 x single salary or 2.5 x joint but with respected lenders lending 5, 6 and even 7 multiples this is in effect placing the borrower into the category of sub-prime because it is high-risk whether that borrower can continue to service that mortgage should rates rise as little as even a single %. I can guess that lenders do not refer to those borrowers on high multiples as sub-prime but to my way of thinking they are.
4. whiteknight said...
Subprime is a clever phrase that has been used to compartmentalise the extent of the problems in peoples mind.
People probably believe some individual who has a poor employment and earnings history to be sub prime.
In reality , precisely as pointed out here; there is really only a single loan book and how much people have borrowed with respect to what they earn and the savings they have.
In reality a lot of investment bankers for example .. instead of buying a property outright with their bonus.. have simply also borrowed 5 to 6 times salary AND bonus . If they lose their bonus or job, because they will have been spending in relative terms right on the limit, they could be 30,000 GBP underwater in less than 2 months. ( and there was me thinking a bonus was a discretionary item that might not be received if the bank did badly - like in a financial crisis for example)
The UK is probably going to have the worst problems of all. I didn't hear of any problems in Germany until 5 seconds before the first bail out - did you?
5. Beach said...
Using Yahoo's Search Term tool I found that "Bad credit & adverse credit mortgages" accounted for the most searches for any type of Mortgage in May on the internet.
Here is how they ranked
68888 - bad credit & adverse credit mortgage
60335 - council house mortgage
31638 - buy to let mortgage
20029 - fixed rate mortgage
17866 - self cert mortgage
I think we can see that the sub prime market is much bigger than people think..
Here is the tool:
http://inventory.uk.overture.com/d/searchinventory/suggestion/
6. Realist said...
Those subprime borrowers whose variable rate discounts and fixed rates are coming up are basically going to move straight on to a very ugly SVR or be offered unpalatable terms for refinancing from whichever lenders are still active in the market.
Like others have said, although the official subprime sector is 10%, there has been a lot of lax lending on top of that be it on stretched multiples or dodgy documentation. What the US has shown is that this stuff only starts to flush out when house prices stall or start dropping. With what is happening in the markets at the moment, the momentum behind the London market (Yolande Barnes' favourite "city state" argument) is going to deflate rather quickly and when the tide goes out there are going to be quite a few naked people on the beach.
7. Orwell said...
Who said that there was no Sub Prime?
The guru always said we were wrong saying that people (including the CMLR) said there was no SP.
Who is right?
8. japanese uncle said...
British economy is not strong at all. Thanks to the stupid TV programmes such as ''Apprentice"", people developed an illusion that this is a nation of natural business managers. Laughable! First of all the quality of busines itself must be enhanced up to the international standard. Trains arriving half an hour late, with no complaints from passengers as they take it for granted. Banks statements that need to be double-checked for a possible error or two. Quality of food served in eating establishments!! ( Actually I am anxious to see the face of a Frenchman who happened to have popped in a 'cafe' in UK and tasted his first bite, in an anticipation that cafe is after all cafe, and must be no different from those back home. )
The recent 'economic miracle' was engineered by Crash B and his colleagues behind the scene, by discouraging people to save through scrapping one after another, any incentive for savings, such as PEP/TESSA replaced by mush less attractive ISA, let alone criminal dismantling of pension tax breaks, thereby driving people to mindless consumption, and most importantly 'property investment' as apparently much more reliable alternative vehicle to provide security after retirement. These two elements, consumption unreasonably made buoyant and property investment (with a significant share comprising BTL) went into an uncontrolled upward spiral via the 'asset effect' or 'feel good factor, to create the housing-credit bubble with an unprecedented scale. Thus one area that is most likely to be hit the severest in the current financial turmoil should be none, but the UK. Just think about the sheer scale of the personal debt per capita in this market!
Incidentally the strength of British businesses largely come from their historical advantage in terms of the established business protocols, including among other things the English language as predominant means of business communication and documentation, which is particularly evident in finance, shipping and insurance, etc. But nowadays one can acquire reasonable knowledge of English in any part of the world, so the days of the British (and American for this matter, indeed) supremacy is numbered even in this area.
9. deepak said...
I wish I had the wisdon of Japanese uncle. I completely agree with him about who is sub prime. Actually I made the same point a few weeks ago.
And termed Sub prime as people who can't service their debts. Irrespective of their credit rating good or bad.
I also argue that in UK sub prime is larger than 10%. It was non existent a few weeks ago and this 10% of what we know now.
Denzil: Are you talking about 5, 6 or 7 times Gross salary or net. Because I say its more. Because there figures are gross and net is worse.
One reason being if your Gross salary goes up 3 times your net salary does not go up 3 times ( due to 40% tax slab kicks in) Hence it is more difficult to service the debt if you just multiply the factors.
Finally, WhiteKnight. I think I need to re phrase Sub Prime also. But I call it "Prim Prime" because of the excessive house price rise and people falling to keep up with their mortgages The homes are repocessed and sold. Firstly the bank got higher interest due to the poor credit history or the applicant.
As the value of home rose they get a bigger credit of it again. Gain either way
Now is that what is called sub prime or Prim Prime.
10. uncle tom said...
The bottom line here is that the amount that mortgage lenders consider safe to lend - what they deem to be 'affordable' for any given borrower - has just taken a nosedive.
The implications for house prices are obvious...
11. Julianw said...
Forget the sub prime label. Repo’s are increasing in all the mortgage sectors, just more quickly in the most vulnerable sector- (sub prime).
Its like a flu epidemic, hits the old and young first. But it is NOT a disease of the old and young- it just makes them ill FIRST.
Eventually even the healthy parts of the population start to sniff.
Sub prime- the label implies a category- a boundary. This is nonsense, the problem is about a debt bubble bursting.
Invested in a MBS? Too late. Probably wont want to do that again.
Got a big debt? - get out now!
12. Mac said...
10%?! I'm with wage slave, I'm sure I read articles a couple months back saying it was around 2%.
With the tightening of criteria cutting the number of people with adverse credit who will be able to get a mortgage, many of those who have taken mortages they can't afford simply won't be able to remortgage to more manageable terms, or keep up payments on existing. Repos and arrears will increase (even more) and may put pressure on lenders to tighten further - as well as further dampening investor enthusiasm. Until this point a subprime, or indeed a prime, borrower could remortgage to more favourable terms, even having missed several payments as a stressed redemption and thus disguising (delaying) the growing arrears problems, now lenders are more likely to be stuck with those illiquid 'assets' on book. It's one thing to put rates up as cost of borrowing has increased, but by limiting access, arrears will be doubly forced up by those 'trapped' with their increasingly unaffordable repayments as they come off fixed rates.
There's potentially another ticking bomb lurking in self-cert mortages, or so-called liar loans. There are millions in self-cert products that require a clean credit history and therefore aren't included in subprime figures. There are of course subprime self-cert too *shudder*.
Tightening criteria is perhaps too late, the millions in subprime have already been taken on and sold on and it will take another 6-18mnths to really see how they perform; bearing in mind that criteria for subprime has been gradually slackening right up to this month as lenders fight for market share - meaning the riskiest loans are barely into their first few months. Arrears and repos won't start to plateau for at least a year on those. I would be interested to know how old the loans in the states are that are going bad, as that would give some indication of how long the UK has before UK portfolios start showing their true colours.
I'm not convinced the US are worse than the UK with thier lending, I think they may just be ahead. The unknown is how far into the mire did we get before noticing what we followed was floundering, and whether we're in as deep.