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Placing sub-prime fears into perspective

There have been lately quite a few stories predicting doom and gloom for the housing market in the UK on the back of the collapse of the US sub-prime market. Standard & Poor’s recently pointed to the similarities between the US and UK sub-prime markets, stating that while the UK sub-prime market was substantially smaller than its US cousin – the market here accounts for only 5% of all UK mortgage lending compared with around 25% in the US – a quarter of those mortgages are already 30 days in arrears. ABN Amro also claimed this month that house prices in the UK are currently at greater risk of collapsing than those in the US had been.

Meanwhile, Kensington, the granddaddy of the sub-prime mortgage market, was forced to reveal it had made losses of 6.2m and that 10% of its mortgage cases were in arrears. Then Credit Action published data – mostly swiped from the British Banker’s Association – revealing the personal debt mountain in the UK had grown to 1.3trn.

This could all be enough to give the more anxious in the mortgage industry the jitters and there are admittedly some worrying signs the UK housing market and the wider economy could hit the skids in a year or three.

Let us just deal with whether it is possible the sub-prime market could collapse in this country in a couple of years.

It would seem almost illogical that the sub-prime market would collapse or even slow down over here. After all, the further people get into debt the greater the chance they will default on one or other of their loan payments or their prime mortgage, making the chance they will have to go onto a non-conforming rate stronger rather than weaker.

But, of course, where this theory falls down is when borrowers get into deeper debt problems and then start defaulting on their sub-prime mortgage payments. This is exactly what happened in the US and that country has a much more mature credit market than anywhere else in the world, meaning America is a much more financially literate nation than the rest of us.

So it is theoretically possible, given the spend-nowpay-never attitude that has been slowly nurtured in this country over the last 20 years or so, that sub-prime might go wrong.

But, of course, the housing market as a whole would have to slow down substantially first, which still looks a reasonably remote possibility right now. Were that to happen, though, then lenders would find such a slowing market a tougher environment to operate in than before. Some could even go to the wall. But this might not necessarily be a bad thing.

If we are honest there are probably too many mortgage lenders in the market and the influx of foreign investment, while a good thing in some ways, does make the market a little more unstable. Meanwhile, there are some lenders that are more than likely pushing their luck when it comes to their credit and risk profiles.

But it is not as if the entire industry is going to collectively lose its shirt either, even if there is a 10% drop in house prices. It just might be that some make less money than they have been doing in recent years. Not, crucially, that they stop making money altogether.

What might this mean for distribution? It will probably mean lenders will need greater access to distribution than ever before. It may mean for a while that lenders might come up with ever more weird and wonderful ways to try to cut distributors out of the value chain. But those that do so will probably have to admit they made a mistake and go back to the firms they tried to cut out of the market with their tails tucked firmly between their legs. It may also mean lenders will want to work with the largest distributors that can give them the greatest volume in the quickest amount of time. This in turn will mean some smaller packagers get swallowed up as satellites because they cannot deliver. So really, it’s a case of nothing much that hasn’t happened before or isn’t happening right now.

Matthew West, editor, Mortgage Distributor


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