Sub-Prime Mortgage Problems In The UK
August 17, 2007
Five brokers who sell sub-prime mortgages are in trouble with the FSA. A review has revealed that some lenders and brokers are offering loans to people who should not have them.
Sub-prime mortgages are for people who find it difficult to get a mortgage in normal circumstances – for instance, they may have bad credit history or have suffered a county court injunction. These people are considered to be at greater risk of defaulting.
The FSA has found some cases of people being offered a mortgage that they really cannot afford, and it is said to be very concerned by the findings. They said they would hesitate to take action in the case of bad practice, as that can lead to serious consequences in the long term.
Sub-prime market consumers may have high debts or poor credit history and, being vulnerable, they need correct assessment and proper advice. Sub-prime mortgages account for 5-6% of all new home loans, and worth about £16bn per year. On the market there are about 160 sub-prime deals currently available. Around 80% of all sub-rime deals are sold by mortgage brokers.
The FSA has been looking into the way brokers and lenders sell sub-prime mortgages for the past three months. It started out by saying it was worried that borrowers might be getting the most suitable and best value mortgage offers.
In recent weeks bad news has come from across the Atlantic where rising interest rates in the United States have meant that some sub-prime borrowers are beginning to default on their mortgages, and clearly some mis-selling had been carried out.
In the UK circumstances are different. The sub-prime market is much smaller, quite as a result of the FSA watching for bad practice, so lenders have to careful how they lend money. Nevertheless, the FSA found that a bad level of poor practice in the 11 lenders and 34 brokers it reviewed.
In a third of broker cases there seemed to be insufficient assessment of the borrower’s ability to repay the mortgage, and in 50% of the cases the borrower’s needs and circumstances were not considered at all. Over half of the customers self-certified their own income, but it was unclear as to why they had to do so. The result was that many of them would end up with a higher interest rate on their mortgage than they could have got. In addition, some borrowers were advised that they should remortgage, with it being demonstrably the right thing to do, and they would suffer early repayment charges as a result.
The FSA believe there may be a case of mis-selling, and possible actions are fines or bans from selling mortgages.
Lenders also came under the spotlight. Some did not carry out checks on the information on the mortgage forms. Some figures may have been exaggerated leading to a loan to big for the borrower to afford.
Although the FSA did not find widespread malpractice, there was enough to give cause for concern in a market that needs the most careful care and attention.
Alan Wright
17th August 2007
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