We don’t want US sub-prime disease

Brokers, lenders and especially overstretched borrowers gave a collective sigh of relief last Thursday when the Bank of England\'s Monetary Policy Committee decided to hold rates for a second month.

After its shock decision to increase rates in January – when everyone had been predicting a hold – many were concerned that another rise was on the cards. But with the stock market’s recent fall and instability in the US housing sector, the consensus last week was that a further rate rise would have been a bridge too far.

And looking at the US market, Ray Boulger, senior technical manager warns: “A weaker housing market will result in a weaker economy and when America sneezes the rest of the world catches a cold. The possibility of a forthcoming depression in the US, which former Federal Reserve chairman Alan Greenspan rates as a one in three chance, won’t have been ignored by the MPC.”

Mortgage Strategy’s Washington correspondent Paul Muolo predicts this week that if things fail to improve in the US and Wall Street bankers don’t again start providing finance for sub-prime mortgages, about 100 sub-prime firms could go under in the next 30 days (See News, page 20).

An olive branch seems unlikely too – Countrywide boss Angelo Mozilo describes Wall Street firms such as Bear Stearns, Merrill Lynch and Credit Suisse as having “no mercy and [being] without compassion”. Merrills and Bear Stearns have bought US wholesale lenders in the past year – just as they have done in the UK.

Muolo says that the likes of Merrills and Bear Stearns may see this crisis as an opportunity to reduce competition with their own mortgage lenders – it makes for an interesting theory.

These same investment firms are now all over the UK sub-prime market like a rash. If the UK faced a similar downturn, domestic sub-prime firms would be left at the whim of the Yanks. Let’s hope the MPC prescribes the right medicine.