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October 8, 2007

Borrowers of sub-prime loans could face repossession

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by Kay Mitchell

Borrowers of sub-prime loans could face repossession

Sub-prime loans are aimed at those who have a poor credit rating. In the USA, an unexpected number of repossessions among these types of borrowers sparked a global financial crisis over the summer.

Sub-prime loans account for 55% of foreclosures, which are the equivalent of repossession hearings. Many years of irresponsible lending resulted in financial markets losing confidence in sub-prime loans. Consequently, this caused the credit crunch that resulted in the problems at Northern Rock.

The study into Britain’s sub-prime market discovered that council tenants on benefits were being urged to lie about their earnings in order to buy their houses under the right-to-buy scheme, many of these are now having their homes repossessed.

Furthermore, families were given mortgages which became unaffordable within a short period of time. An investigation by the BBC discovered that sub-prime mortgage lenders who specialise in these mortgages make up over 70% of all repossessions.
The market for high interest sub-prime mortgages has been expanding rapidly and it now makes up for about 8% of the total UK mortgage market.

This trade in debt has become a multi-billion pound industry in London and several investors, including pension funds, have acquired a slice of this market. However, the risk is caused by a growing amount of people being mis-sold these mortgages and can never afford to pay them back. Whoever is left with this debt may suddenly find it to be of no value.

12 months ago, Southern Pacific Mortgages, which is owned by US investment bank Lehman Brothers, was forced to buy back £13 million worth of mortgages it had sold on after establishing that they had all been sold fraudulently.

Furthermore, fears about the effect the subprime mortgage crisis could have on the world economy have re-surfaced after Merrill Lynch, the major Wall Street bank, wrote off £2.75 billion. The bank said the loss was due to bad investments in mortgages and other debt instruments. The bank is the biggest stockbroker in the world and holds stakes in most major UK companies.

The Council for Mortgage Lenders (CML) has welcomed the BBC’s research, commenting that many are unaware about the extent of repossessions among sub-prime borrowers.

A CML spokesperson acknowledged that the outlook was worsening in the sub-prime sector and lenders must check whether their customers can afford repayments. CML concluded that it is the lender’s responsibility to check whether a borrower can pay and to ensure their advisers are trustworthy.

A programme dedicated to this subject is on Panorama tonight on BBC1 at 8.30pm.

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