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LONDON (Reuters) - Lenders have been more conservative so far than their U.S. counterparts in providing mortgages to those with less than perfect credit histories, though standards are on the slide.
The subprime mortgage market is newer and smaller than its equivalent across the Atlantic, which means it has had less opportunity to come unstuck.
Subprime loans account for around 8 percent of mortgage lending, according to the FSA, versus 20 percent of U.S. lending in 2006.
Both Citigroup and S&P estimate the UK's outstanding "nonconforming" mortgage bonds -- a broader definition that includes borrowers with poor credit histories and those who do not meet lending criteria for other reasons -- at about $70 billion (34.2 billion pounds), compared with $565 billion of U.S. subprime bonds.
"It is not as evolved as in the United States," said one UK-based credit analyst, before qualifying his remark. "Perhaps I should say the U.S. is worse, and this market has not been as bad."
In the United States, the subprime market ballooned after interest rates began to rise in 2004 and mortgage refinancing dropped off, while mortgage bonds were still in strong demand in the capital markets.
Lenders looked for ways to keep up volumes and so relaxed lending criteria and turned to riskier products such as negative amortisation loans, with initial repayments so low they do not even cover interest, so the outstanding amount grows.
Another risky product was piggyback arrangements to finance down payments, which accounted for 29 percent of all U.S. subprime lending in 2006, according to Standard & Poor's.
The UK nonconforming mortgage market got its start only in the mid-1990s, when borrowers who had defaulted due to a recession and collapse in house prices in the early 1990s sought to re-enter the market, said Andrew South, a director at Standard & Poor's.
THE PRIMROSE PATH
Like their U.S. counterparts, however, UK lenders have recently been tempted to loosen their criteria.
A growing number of lenders have been entering the adverse credit market, pushing down margins, according to a report by the Council of Mortgage Lenders, which estimated the number at more than 30 in November.
"There has been a huge increase this year, with normal, mainstream mortgage lenders getting into it," said Katie Tucker, a mortgage specialist at broker John Charcol.
That means the consumer with a poor credit history has more options for finding a loan, because each lender has its own risk model -- one may allow court judgments but refuse a borrower who has missed payments, while another is unfazed by missed payments but rejects anyone hit by a court judgment, she explained.
Even so, products such as piggyback loans that finance 100 percent of a house purchase are not yet part of the UK scene. A few lenders will finance as much as 95 percent, Tucker said.
Overall market figures show the UK still has higher standards. More than 70 percent of U.S. subprime mortgages in 2006 were for more than 80 percent of purchase prices, compared with 54 percent of UK nonconforming loans, according to S&P.
Source: business.scotsman.com |
