by Mark Johnston
A whole three years have passed since the financial crisis brought on by the sub prime mortgage market. Many UK citizens are only just feeling the pinch from having ton bail out many of the lenders that caused the melt down.
With this in mind it may well come as a surprise that lenders offering mortgages to people with bad credit history are starting to appear in the UK market. Is this the start of the return to sub prime mortgages or has the industry learnt its lesson?
Precise Mortgages has just been approved by the FSA to lend to home owners in the UK. They say they are aiming to offer mortgages to home owners with little risk and good credit but have lined up potential customers that high street bank and building societies have turned away.
Other lenders such as Kensington Mortgage Company have also entered the market to offer mortgages to customers with poor credit histories. Kensington Mortgages even highlights on their sales literature to brokers that it will consider borrowers who have country court judgments and default payments on other loans.
Although the lenders steer well clear of referring to the market segment they are aiming at as “sub prime” these are exactly the type of borrowers that banks and building societies lent to which caused the credit crunch and financial crisis. A spokesperson from Kensington Mortgages said: “we don’t like the phrase sub prime borrowers…instead we prefer to say ‘overlooked by the high street’”
Although these borrowers can be high risk, they also represent great returns for lenders as they can charge them much higher rates of interest to compensate for the risk they are taking.
Sub prime mortgages were widely blamed for the financial meltdown in 2007. During the property boom, lenders were willing to offer anyone a mortgages no matter what they’re historic or whether they could afford it. Most lenders didn’t even ask for proof of income or affordability. The debt was packaged up into mortgage backed securities which were sold on as financial instruments but a housing collapse in the US and wide spread defaults caused the bottom to drop out of the £6.5 trillion market. Lenders posted massive losses and stopped lending to each other as the extent of this issue became apparent. Many lenders had to get government bailouts and some even closed their doors for good. Since then the industry has been fragile and has been very cautious and have tightened their lending criteria which has crippled the UK housing market.
Alan Cleary, Precise Mortgages managing director said: “Our customers will be very minor adverse credit. It could be as trivial as having missed one credit card payment six to nine months ago. That alone would stop a lot of people from qualifying for a mortgage at the moment.”
Precise Mortgages are insistent that lessons have be learned and that new FSA regulation have tightened up lending criteria but Damon Gibbons, of the Centre for Responsible Credit said: “As we went into the recession, the response by lenders has been a flight to quality. What that has done is create a growing number of people whom the mainstream won’t serve. In turn, that creates a pool of demand for sub-prime at higher interest rates, and it becomes very profitable for the banks as a whole to see the mortgage market segment in this way.”
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