Loans - Sub prime loans in the UK

Sub prime lending has mainly been attributed as an American phenomenon but the UK has also done some big business in the sub prime market.

There are different ways that lenders have offered sub prime deals in the UK. Firstly, the lending has taken the form of providing loans or mortgages to those borrowers who may have a less than perfect credit rating or a “problematic employment status”. 
Also sub prime lending in the UK has been for people who borrow against the increased value of their homes, often to pay off other borrowings.

The problems in the US with sub prime lending have had major reverberations for the UK economy. The UK was mainly hit by the sub prime crisis because UK banks had bought sub prime loans from the US. Subsequently repossessions and defaulting of those very same sub prime loans have left banks involved vulnerable. Two UK banks that were major casualties were Northern Rock and HSBC, but pretty much all the banks are feeling the reverberations resulting from the sub prime blow out.

UK banking giant HSBC has been struggling with bad-debt provisions in the US since it bought sub-prime lender Household International, which it renamed HSBC Finance.
HSBC revealed earlier this month that its bad debt provisions would be about $10.5bn (£5bn) - largely because of mortgage defaults.  

As a result of the sub prime crisis, which effectively put an end to the previously easy flow of money between banks, Northern Rock has struggled to raise money to finance its lending ever since money markets seized up over the summer. Unlike most banks, which get their money from customers making deposits into savings accounts, Northern Rock is built around its mortgage business. It raises most of the money which it provides for mortgages by borrowing from banks and other financial institutions.

The risks that lenders generally take in providing sub prime loans are higher than is the case with a mainstream loan. However, the level of bad debts recorded by most sub-prime lenders had, until recently, been relatively low. Traditionally, the big UK retail banks have steered clear of sub-prime lending.

But some big names such as HSBC and Alliance & Leicester have been targeting the sub-prime market. Adverts offering loans and mortgages to people with poor credit histories are widespread on cable and satellite TV channels.

However, reports last year suggested that Britain's Financial Services Authority (FSA) was becoming worried at the amount of money flooding into the sub-prime market. It suggested that investment banks - which help fund the sub-prime market - could get their fingers burnt if the economy were to suffer a downturn.

A lot of criticism in the UK has been directed at the way sub prime loans and mortgages applications were processed. Nearly half of all sub prime mortgages in the UK are estimated to be self-certification loans - where borrowers state their incomes, which the lenders will not always check. This system ultimately left the door open to a considerable amount of mortgage fraud.

Unscrupulous advisers to get a deal approved would encourage borrowers to inflate their income to ensure their mortgage application would be successful.

Investment bank Merrill Lynch has estimated that the sub-prime mortgage market in the UK alone was worth between £25bn and £30bn in 2005.

According to market analyst group Datamonitor, mainstream mortgage lending grew by 4.1% in the year previous to that, while sub-prime mortgage lending rose 9.1% for the period.

Until recently, the future of the sub-prime sector had looked rosy.

But the troubles besetting the US, and higher interest rates in the US, UK and across Europe, have raised concerns in some corners about the long-term viability of the industry.

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THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPATMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT
MISSING PAYMENTS WILL HAVE SEVERE CONSEQUENCES AND MAY MAKE OBTAINING CREDIT MORE DIFFICULT IN THE FUTURE.


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