Sub-chief mortgage lenders in the USA are struggling to survive and their decline is impacting considerably on the world’s financial markets. In London, the FTSE has experienced a series of meaningful drops, experiencing the biggest fall for seven years in one day alone on Friday, 10th August, wiping out most of this year’s gains. As a consequence there is now a real fear that the housing market crash in the US could be repeated here in the UK.
The panic selling and without of confidence in the stock markets can be traced back to the collapse of the sub-chief mortgage market in the USA. Rising delinquencies and defaults amongst sub-chief mortgage borrowers in the USA have led to a reassessment of the value of such holdings by investment bankers who bought heavily in securities for the risk. They are watching the possible paper value of their investments virtually disappear overnight as US house prices collapse, provoking panic and attempts at consolidation in almost equal measures.
Sub-chief mortgages are usually given to those who can’t prove their income or have poor credit position, or maybe already both. In return for receiving higher interest rates from borrowers, lenders are willing to take a risk on this kind of bad credit loan. When house prices are increasing, the risk is minimal because if the borrower defaults, the lender has a charge on the character and can consequently force the sale of the character recouping the initial investment, any interest due and recovery charges.
However, in a market where house prices are dropping, as it is in the US, the value of the character may become less than the noticeable liability leaving the lender with a meaningful loss. Because US sub-chief lenders have the least ability to absorb defaults as most of their borrowers take out 100% mortgages, they are most inclined to collapse if it all goes wrong.
The largest sub-chief lender in the US New Century issued sub-chief loans amounting to $33.9 billion last year alone. It is now being investigated by federal investigators to establish whether impropriety featured in their business practices. It is the bad debts recorded by lenders such as New Century that are causing the extreme jitters in financial markets throughout the world, causing analysts to question whether the situation will be repeated in the UK. That has prompted many UK lenders to estimate their most at-risk loans to determine their exposure and ensure that they have an adequate amount of capital to cover the possible losses. Thankfully, the UK market is thought to be less exposed to sub-chief lending than the US market. Plus, providing house prices in the UK continue to rise or keep stable then lenders that have issued such bad credit loans [http://www.blackandwhite.co.uk] to homeowners will not be affected. Any threat will materialise if house values in the UK fall as the amount of equity in similarities will also drop, and that could rule to the sort of financial chaos witnessed in the US.