Sub-prime mortgages.

[Leekbrookgull]

Please can someone explain exactly what they are and how they work.

 

[The Clown of Pevensey Bay]

They are loans, secured against houses, that are offered to people whose credit rating is not particularly high.

Someone with a good income and a hefty deposit in the bank is a prime customer, and may get a mortgage with a competitive interest rate. A sub-prime customer may have a lower or less steady income, less capital, or other credit problems (such as a history of bad debt). They can have a mortgage, but normally have to pay a higher interest rate.

The problem occurs when property prices fall. Sub prime customers have negative equity and are often unable to pay back the loan. Leaving the bank which made the loan in the shit.

Hope this helps. I got D at economics A-level.

 

[Uncle Spielberg]

The term " Sub Prime " comes from the USA mortgage market. Sub Prime basically means someone who has a less than satisfactory credit history and other areas in their profile which means they cannot get a " Status " mortgage from a High Street Lender. This can include self certification type mortgages where an income is declared but does not have to be proved / cannot be proved. There is also " Non Status " mortgages where someone signs a declaration stating they can afford the mortgage and does not even have to delcare and income. A few of these " Non Status " products where around but the FSA quite rightly banned them when they took over regulating mortgage in 2004. They USA however did a lot of " Non Status " mortgages.

The USA basically lent money to anyone who had a deposit of as little as 5% of the property as long as the mirror steamed up. They lent money to people who had little chance of paying it back , people who had bad credit history and or a very poor income profile. This lending was highly irresponsible and it has come home to roost. Unfortunately as the USA has the biggest lending and banking market in the World this bad lending has affected us as it is difficult for lenders to get money on the World markets as the money being lent around organisations has dried up.

The " Sub Prime " market here was far more closely monitored and regulated and accounted for under 10% of the mortgage market so we will not have the same backdraft as they have had in the USA. It will however mean for this year and maybe into next it will be much harder to get credit even for people with a good credit history and impossible for people with bad credit. I expect this to blow over by next year and in the meantime people will have to tighted their belts.

 

[Fungus]

The problem occurs when property prices fall. Sub prime customers have negative equity and are often unable to pay back the loan. Leaving the bank which made the loan in the shit.

Not just the bank that made the loan. To spread the risk, these loans are then packaged up and sold on to other banks, who don't know what they're buying until the sh!t hits the fan.

 

[The Clown of Pevensey Bay]

Not just the bank that made the loan. To spread the risk, these loans are then packaged up and sold on to other banks, who don't know what they're buying until the sh!t hits the fan.

Indeed. I was trying to keep it as simple as possible, but you're dead right,

 

[Beach Hut]

So therefore banks stop offering a sub-prime mortgage as too risky hence the reason it is harder now for any 1st time buyer to get a mortgage in the UK ?

 

[Uncle Spielberg]

First Time buyers have no mortgage payment history which the lenders are regarding as an inheritant risk in itself at the moment. Having said that I still have lots of 95% and a few 100% mortgages for FTB's.

 

[Lord Bracknell]

If the crisis in the banking sector spills over into the real economy (which it almost certainly will), this will affect the employment prospects (and income) of "prime" borrowers. Combined with higher interest rates all round, this will tip them into difficulty in repaying the mortgage.

This is no time to be young.

 

[Uncle Spielberg]

All lenders are raising the credit score needed to pass. 4 in 10 applications are rejected on average compared to 2 in 10 , 6 months ago. Lenders are not going to chase market share this year like they have recently. It has been a game they play to see who can get the highest market share. HBOS group of proud of their 25% market share, Abbey have been aggressively chasing market share since last year since the Spanish bank owned them. A certain lender in the market is 40% over target in the last year which 3 months ago was great but now they are bricking it as a lot of the lending was in the 90-95% bracket and they are overexposed.

Lenders will want to retain their good paying existing customers so I expect them to offer good clients a great new deal when their present rate ends something they have been lazy in doing in the past and retain their book. They will not be chasing market share and anyone with a less than perfect credit profile will be as welcome as Norman Baker at the Falmer opening game.

 

[The Merry Prankster]

This is no time to be young.

I wouldn't wish age on them though.

 

[zego]

Sub-prime means almost whatever you want it to mean.

At the moment it is just another way of saying scapegoat.

Negative equity is indiscriminate about the status the borrower had when taking out the mortgage. It doesn't change your current contract with the lender, but should change the lenders business strategy as the risk to them has been increased.

That said, low-start mortgages often have terms weighted heavily in favour of the lender when the low-rate period ends. That is when you realize that the offer which was almost too good to be true was just that.

 

[Leekbrookgull]

'Clown' thanks for that,you kept it simple. However one question always leads to another ! How are mortages 'sold on' ? As a one off or in packages ? If so how is a package made up ?

 

[beorhthelm]

Lenders will want to retain their good paying existing customers so I expect them to offer good clients a great new deal when their present rate ends something they have been lazy in doing in the past and retain their book.

im glad you said that as thats what ive been thinking (hoping). if i pay all the bills, have good equity and dont ask for too much on a remortgage, this isnt going to be too much bother is it?

 

[The Clown of Pevensey Bay]

'Clown' thanks for that,you kept it simple. However one question always leads to another ! How are mortages 'sold on' ? As a one off or in packages ? If so how is a package made up ?

It's a bit like this. Say I lend you 100 pounds, and you agree to pay me back two pounds a month for fifty months, plus interest.

Then after five months I realise that you're a bit crap at repaying and have missed one payment. But I can't call your loan in, yet, because we've signed an agreement.

So in order to save my capital, I "sell" the loan to Uncle Spielberg for ninety pounds, and you continue to make the repayments to him.

I've got eight pounds from you, plus a bit of interest, plus 90 pounds from Uncle S. So I'm still up on the deal.

After another five months, Uncle S notices that you've defaulted on another payment, and sells the loan on to Beach Hut. He makes a profit too, but a smaller one than me -- and Beach Hut is the next MUG to be landed with a loan which he doesn't yet know is really dodgy.

It's like that, only on a MUCH bigger scale, and with lots of mortgages at once.

 

[Beach Hut]

After another five months, Uncle S notices that you've defaulted on another payment, and sells the loan on to Beach Hut. He makes a profit too, but a smaller one than me -- and Beach Hut is the next MUG to be landed with a loan which he doesn't yet know is really dodgy.

Sums me up - Mr Mugins picking up all the dodgy loans

 

[The Clown of Pevensey Bay]

If the crisis in the banking sector spills over into the real economy (which it almost certainly will), this will affect the employment prospects (and income) of "prime" borrowers. Combined with higher interest rates all round, this will tip them into difficulty in repaying the mortgage.

This is no time to be young.

I'm young-ish and I'm attempting to offload the house I own at present, and stick the profit in the bank until this whole horrible affair blows over.

 

[Porky]

They are loans, secured against houses, that are offered to people whose credit rating is not particularly high.

Someone with a good income and a hefty deposit in the bank is a prime customer, and may get a mortgage with a competitive interest rate. A sub-prime customer may have a lower or less steady income, less capital, or other credit problems (such as a history of bad debt). They can have a mortgage, but normally have to pay a higher interest rate.

The problem occurs when property prices fall. Sub prime customers have negative equity and are often unable to pay back the loan. Leaving the bank which made the loan in the shit.

Hope this helps. I got D at economics A-level.

Concise and to the point C of P. Whitehall bailed out Northern Roc, Washington has just bailed out Bear Stearns.

 

[Leekbrookgull]

Clown,you seem to know your stuff. I there a tipping point in lending such as your borrowing must be say only up to 40% of your income. You see we have just a £50k mortgage on a £200k plus house. Our joint income easily covers our £295 p/mth mortgage and we both have very little on cards,and i feel as long as we remain prudent we will be ok. However is all this about to unravel in the U/K ?

 

[Uncle C]

I'm young-ish and I'm attempting to offload the house I own at present, and stick the profit in the bank until this whole horrible affair blows over.

Is this such a wise move?

You will have fees to sell it, fees to re-buy when you are ready and rent to pay in the interim. I would sit tight if you can.

After this whole horrible affair there will be another waiting in the wings - its called life.

 

[Beach Hut]

Is this such a wise move?

You will have fees to sell it, fees to re-buy when you are ready and rent to pay in the interim. I would sit tight if you can.

After this whole horrible affair there will be another waiting in the wings - its called life.

I would stay put as well, this is a long over due correction to house prices that was bound to happen at some point.

Give it a year or so and everyone will have forgotten this unless we are heading for a long world wide recession.