Is U K Subprime Going The Same Way As The U S?

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Is UK subprime going the same way as the US?

In the current climate, it is hard to imagine a more terrifying top line for a piece of research. Subprime is now well-established as finance’s big, bad wolf of 2007.

But analysts at Dresdner Kleinwort raise just that prospect, on the back of the latest half year figures from the UK’s Council of Mortgage Lenders, published on Friday.

For those that missed the hysterical headlines in the weekend papers, DK explain that the problem is not the absolute number of repossessions. That is rising, but at 0.12 per cent of all mortgages outstanding in the first half is still at a low level.

75.jpgBut the CML’s latest data was revised to better reflect the growth of subprime lending in recent years. And as a proportion of mortgage arrears, repossessions have been rising dramatically. It is by this measure that the situation stands at a historically unprecedented level (see chart from DK right.)

Analyst David Owen points out that the greater risk inherent in subprime lending means arrears are more likely to lead to repossessions, and that this is likely to happen earlier. So, as the CML itself argues, this rise reflects the increasing amount of subprime in the overall mortgage market.

Standard and Poor’s has been among those to argue previously that the UK is less susceptible to the kind of subprime meltdown felt stateside, with generally more conservative lending practices.

But since that report was published back in April, the FSA has flagged up its concerns that the kind of unverified, blank chequebook lending that has been widespread in the US has also been on offer in the UK.

So what do we learn from the US experience? That this problem doesn’t become a problem until the house price inflation slows, and then reverses, exposing all those over-stretched borrowers.

“Think what could happen if house prices fell,” says DK’s Owen, adding:

Complicating analysis is the fact that even following the CML revisions, we still do not know with certainty the size, growth and performance of the sub-prime sector in the UK.