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The return of sub-prime: mortgage firms target 'overlooked' market
Warning from watchdog as hundreds of millions of pounds of loans made available to people with poor credit history
* Patrick Collinson and Rupert Jones
* guardian.co.uk, Friday 29 October 2010 14.47 BST
Three years after huge losses on sub-prime mortgages sparked the global financial meltdown, lenders are entering the British market with promises of home loans for people with a poor credit history.
A new lender, Precise Mortgages, says it has lined up hundreds of millions of pounds in funds to begin offering home loans to buyers excluded by the mainstream banks. The Wolverhampton-based company will launch the mortgages this year after gaining approval from the Financial Services Authority this week. It will target individuals turned down by high street banks because of a blot on their credit record.
Two other niche lenders, Kensington Mortgage Company and Aldermore, have also in recent months begun offering sub-prime loans. In information prepared for "intermediary use only", Kensington says it will accept borrowers who have already had two county court judgments in the last two years and up to two defaults on unsecured loans.
None of the lenders use the phrase "sub-prime", preferring to describe customers as good quality risks with minor blemishes on their credit record. These customers can be highly profitable for lenders as interest charged on the mortgages is significantly higher than standard rates. A spokesman for Kensington said it did not like the phrase sub-prime borrowers: "We say 'overlooked by the high street'."
Critics blame irresponsible sub-prime lending during the 2005-2007 period as the catalyst for the financial crash. At the height of the property market in 2007, sub-prime mortgages – frequently granted to people with little proof of income or ability to repay – made up more than 7% of the UK loans market. In the US, where the sub-prime boom was even bigger, they became known as Ninja loans – no income, no job and no assets.
Many of the loans were packaged into mortgage-backed securities, and when the $6.5tn market collapsed, lending between banks froze. In September 2007 Northern Rock became the first major UK casualty of the wider sub-prime crisis. Most sub-prime lenders in the UK, controlled by the investment banks, shut down during 2008 and 2009 and the products all but disappeared.
Alan Cleary, managing director of Precise Mortgages, said the lessons of the crisis had been learned and that income affordability checks were now much tighter. New FSA rules have effectively banned lending to individuals who cannot prove their income. Cleary 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."
Figures today from the Bank of England revealed that net new mortgage lending (not including redemptions and repayments) in September was £112m, down from £1.62bn in August. Economists warn that moribund lending volumes are pushing the property market towards a double dip. Yesterday Nationwide said house prices fell by 0.7% in October, taking the quarter-on-quarter drop to 1.5%, the biggest decline since April 2009.
Precise Mortgages says the reintroduction of lending to those with poorer credit records will help boost the market. "The good news here is that we are providing new funding. Elsewhere in the mortgage market, everything has to be funded by deposits, which is why there are so few mortgages available. We are bringing brand-new cash into the marketplace."
Damon Gibbons, of the Centre for Responsible Credit, said he was concerned about "predatory pricing" of mortgages to those excluded by the high street. "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."
Gibbons said he wanted a reform of credit scoring systems, but warned that unless there was an improved supply of housing, new lending would inflate house prices and create another bubble.
gh
Warning from watchdog as hundreds of millions of pounds of loans made available to people with poor credit history
* Patrick Collinson and Rupert Jones
* guardian.co.uk, Friday 29 October 2010 14.47 BST
Three years after huge losses on sub-prime mortgages sparked the global financial meltdown, lenders are entering the British market with promises of home loans for people with a poor credit history.
A new lender, Precise Mortgages, says it has lined up hundreds of millions of pounds in funds to begin offering home loans to buyers excluded by the mainstream banks. The Wolverhampton-based company will launch the mortgages this year after gaining approval from the Financial Services Authority this week. It will target individuals turned down by high street banks because of a blot on their credit record.
Two other niche lenders, Kensington Mortgage Company and Aldermore, have also in recent months begun offering sub-prime loans. In information prepared for "intermediary use only", Kensington says it will accept borrowers who have already had two county court judgments in the last two years and up to two defaults on unsecured loans.
None of the lenders use the phrase "sub-prime", preferring to describe customers as good quality risks with minor blemishes on their credit record. These customers can be highly profitable for lenders as interest charged on the mortgages is significantly higher than standard rates. A spokesman for Kensington said it did not like the phrase sub-prime borrowers: "We say 'overlooked by the high street'."
Critics blame irresponsible sub-prime lending during the 2005-2007 period as the catalyst for the financial crash. At the height of the property market in 2007, sub-prime mortgages – frequently granted to people with little proof of income or ability to repay – made up more than 7% of the UK loans market. In the US, where the sub-prime boom was even bigger, they became known as Ninja loans – no income, no job and no assets.
Many of the loans were packaged into mortgage-backed securities, and when the $6.5tn market collapsed, lending between banks froze. In September 2007 Northern Rock became the first major UK casualty of the wider sub-prime crisis. Most sub-prime lenders in the UK, controlled by the investment banks, shut down during 2008 and 2009 and the products all but disappeared.
Alan Cleary, managing director of Precise Mortgages, said the lessons of the crisis had been learned and that income affordability checks were now much tighter. New FSA rules have effectively banned lending to individuals who cannot prove their income. Cleary 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."
Figures today from the Bank of England revealed that net new mortgage lending (not including redemptions and repayments) in September was £112m, down from £1.62bn in August. Economists warn that moribund lending volumes are pushing the property market towards a double dip. Yesterday Nationwide said house prices fell by 0.7% in October, taking the quarter-on-quarter drop to 1.5%, the biggest decline since April 2009.
Precise Mortgages says the reintroduction of lending to those with poorer credit records will help boost the market. "The good news here is that we are providing new funding. Elsewhere in the mortgage market, everything has to be funded by deposits, which is why there are so few mortgages available. We are bringing brand-new cash into the marketplace."
Damon Gibbons, of the Centre for Responsible Credit, said he was concerned about "predatory pricing" of mortgages to those excluded by the high street. "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."
Gibbons said he wanted a reform of credit scoring systems, but warned that unless there was an improved supply of housing, new lending would inflate house prices and create another bubble.
gh